McDonald's Misses... Has Its Cycle Finally Peaked? (MCD, YUM, SBUX, DNKN)

Same-store sales figures out this morning from McDonald’s Corp. (NYSE: MCD) have come in weaker than the consensus estimate and that is dragging shares down by more than -4% in the first hour of trading. Worldwide same-store sales grew 3.5%, compared with an estimate of 5%, and US sales grew 3.9%, while analysts’ expected a gain of 4.5%.  After the growth that you have seen from the Golden Arches, you have to start wondering about one thing: “Has McDonald’s finally reached its peak growth cycle here?”

Other fast food stores like KFC and Pizza Hut from Yum! Brands, Inc. (NYSE: YUM), Starbucks Corp. (NASDAQ: SBUX), and Dunkin’ Brands Group (NAASDAQ: DNKN) have not reported sales yet, but their share prices are also soft as the results from McDonald’s offer investors a peek at what to expect from the rest of the sector.

McDonald’s weaker-than-expected sales are due to a steep decline of -8.2% in Japan and the effects of Hurricane Irene, which hurt traffic to stores on the east coast. But the results could also be pointing to a slowdown in consumer spending as the weak US economy makes customers wary about spending even for a Big Mac.

The company said that sales growth in China and Australia were offset by the big drop in Japanese sales. A report from Japan noted that sales a year ago were boosted by an ongoing promotional campaign and that changes in work habits in Japan since the March earthquake and tsunami have changed the pattern of weekend visits by consumers. The country’s efforts to lower electricity demand in the wake of the disaster has caused some Japanese to begin working weekends, reducing weekend family visits to McDonald’s stores. But the sales drop was even worse than the -7.3% decline in March sales, so there could be something else causing the weak sales.

European sales rose 2.7%, an improvement on sales growth of 2.2% in August 2010. McDonald’s attributes that to the ongoing modernization of its stores in Europe, premium offerings, and “locally-relevant food events.”

McDonald’s business thrives when economies are weak and customers wanting to dine out look for cheaper-than-usual locations. If McDonald’s business is faltering during weak economic times, the outlook for consumer confidence is likely to be fairly bleak. Higher priced offerings from Starbucks, for example, are likely to fare even worse.

McDonald’s shares are down -4.1% in the first 45 minutes of trading this morning, at $84.93, in a 52-week range of $72.14-$91.22. Yum shares are down about -2.3%, at $52.14, in a 52-week range of $43.66-$57.75. Starbucks shares are down nearly -2%, at $38.18, in a 52-week range of $24.53-$41.11. Dunkin’ shares are off nearly -1%, at $25.77, in a range of $24.97-$31.94.

After looking through the data, there are some simple explanations here.  You can count on Wall Street to be tracking this closely.  If there is another bad month of sales reported, the investment community will say that the endless growth cycle has peaked here.

Paul Ausick