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After a stellar 2017, McDonald's is stumbling to start 2018

Myles Udland
Markets Reporter

After a huge year in 2017, Wall Street analysts see McDonald’s (MCD) stumbling to start 2018.

“We have spoken with three MCD franchisees across the US to gauge trends so far in [the first quarter],” writes Credit Suisse analyst Jason West. “While these checks are anecdotal, they have been directionally helpful in the past. MCD franchisees consistently reported that sales have slowed so far this year. As such, we’ve lowered our 1Q US same store sales (SSS) forecast to +1.5% from +3.5%.”

Credit Suisse notes that Wall Street consensus is still expecting a 3.6% increase in same-store sales — or sales at locations open at least a year — in the first quarter. As a result, the firm cut its price target on the stock to $175 per share from $191.

Shares of McDonald’s were trading near $151 per share early Tuesday.

In 2017, McDonald’s shares gained 41% and shares closed at an all-time high of $178 per share on January 26. Year-to-date, the stock is down 12%, third-worst among the 30 Dow members.

After a huge run higher in 2017, McDonald’s shares are among the Dow’s worst performers to start 2018. (Source: Yahoo Finance)

A point of stress for McDonald’s franchisees so far this year appears to be the rollout of the company’s new $1, $2, $3 Dollar Menu, which West says “has not performed up to expectations.” The new menu was rolled out in early January.

On the company’s fourth quarter earnings call in late January, CEO Steve Easterbrook said it was “too early” to provide feedback on the new menu’s success, but said he expects it will take three to six months for the new dollar menu to “fully embed in the minds of consumers.”

In the coming quarters, Credit Suisse expects McDonald’s sales to rebound to the 3% growth level it had forecast as the new dollar menu gains awareness, comparable sales get easier on a three-year rolling basis, and the company rolls out fresh beef nationwide. On Tuesday, the company began selling fresh beef patties in 3,500 stores. A nationwide rollout is expected by May.

But the analyst community-at-large is certainly looking at a downbeat start to the year for the Golden Arches.

Credit Suisse’s commentary on Tuesday followed a similar noted at RBC last week, which cut its first quarter sales forecast to 1% growth from 3.5% previously. RBC’s David Palmer also cited disappointing performance of McDonald’s new dollar menu and lowered his price target on the stock to $170 from $190 per share, according to CNBC. Bank of America Merrill Lynch also cut its expectations for McDonald’s sales growth and earnings per share in 2018.

And in its note on Tuesday, Credit Suisse added that, “while the sales slowdown appears party due to some short-term factors (weather, tough promo compared), we also have to question if the decision to launch a major new value menu alongside a significant adjustment in the market allocation to national over local was the right move, particularly given the strong positive momentum in the brand in recent quarters.”

When CEO Steve Easterbrook took over at McDonald’s in 2015, the brand was flailing after years of disappointing sales trends. Since the third quarter of 2015, same-store sales have grown every quarter. Wall Street has been a fan of his tenure, with the stock up over 50% in the last three years.

But continuing changes with new menu initiatives and new marketing pushes will likely keep pressuring a company trying to remake itself for the modern consumer.

This story is a part of Yahoo Finance Presents: The Retail Revolution , March 5-9, 2018.

Retail Revolution (Illustration by Thomas Porostocky)

Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland

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