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McDonalds (NYSE: MCD) Alarm Bells Are Ringing

24/7 Wall st

Key Points

  • McDonald’s earnings fell short due to poor margins, declining traffic, and pricing issues.
  • Rising costs, competition from Wendy’s, and failing kiosks add to their struggles.
  • Overbuilding and lack of catalysts leave McDonald’s with a bleak outlook, especially if the economy worsens.
  • Also: The top dividend legends can provide a second income for investors

Lee and Doug discuss the troubling earnings report from McDonald’s (NYSE: MCD), highlighting declining margins, store traffic, and a series of operational challenges. They express concern that these issues might indicate a weaker economy, as a slowdown in McDonald’s traffic often signals broader economic problems. They also touch on the failure of recent promotions, like the $5 meal, which didn’t significantly boost sales, and the challenges of high labor costs in states like California. The conversation concludes with skepticism about any potential catalysts that could improve McDonald’s financial performance in the near future.

Transcript:

So the two really famous fast foodie places in the United States, Starbucks and McDonald’s, announced their earnings.

In both cases, people were incredibly disappointed and for good reason.

So let’s take a look at these separately.

Let’s start off.

You tell me what was wrong with McDonald’s.

Their margins were bad.

Store traffic, interestingly enough, was bad.

And it’s got to make you think that, uh-oh.

Uh-oh, maybe this economy is a little bit weaker than anybody is really counting on because if store traffic at McDonald’s slows down, it’s gonna really slow down at places where it’s more expensive.

And then they had the $18 Big Mac fiasco, but I mean, margins, store traffic, all metrics that they need to trend higher failed.

And then also they’re having some issues in places like California where they want to take the minimum wage, which is at $20 and raise it.

And there’s, you know, franchisee owners out there, franchise owners that are like, I can’t pay this.

And a lot of the kiosks aren’t working that great and all of that.

So it’s a cornucopia of problems for McDonald’s.

Well, also, I wrote a story for us a few days ago where I suggested maybe they had to go to a $1 meal.

Because, look, the $5 meal, they should have gotten something.

And, you know, they said they got a little out of it.

But when you make an offer like that, and they banged the drum on that so hard, their public relations department worked 24 hours a day, probably for weeks.

And it wasn’t a needle mover.

I understand it had some effects.

So what’s wrong?

$5 meal.

I mean, I’m going to go there.

Well, number one, places like Wendy’s, Wendy’s has had a four and five dollar meal for years, you know.

And I would submit to you, not that I’m any sort of fast food devotee, but I would submit to you that Wendy’s food is better than McDonald’s.

Their food is not very good.

And I think that’s a large part of it.

And people see the advertisement so they go, here’s the five dollar meal, look at that delicious, you know, double burger.

And then you get one at the place and it’s, it’s horrible.

So I think, you know, the mere fact that other companies have had them and have been out there.

So people are like, well, what’s the big deal at McDonald’s?

This has been at Wendy’s forever.

And B, the food is just not as good.

It’s really bad.

McDonald’s is a company right now where I don’t see a catalyst that’s going to make this better.

They’re pointing out that maybe it’s a sign that the economy is getting weaker.

If that’s true, the results from McDonald’s are going to get even weaker.

Store expansion is almost out of the question.

I think they’re one of the reason parents take children there is a happy meal.

B, it’s they have playgrounds in a lot of them.

And that’s one of the only edges they’ve had for years is that, okay, I’ll take the kid there because the kid can get the happy meal and I can play in the big, you know, rubber ball thing.

But, you know, Wendy’s doesn’t have that and other fast food places don’t have that, but that can’t be, you know.

When it’s integrated into building a new McDonald’s, that’s got to add a lot of cost.

It’s got to add a lot of cost.

And it’s sort of like, look, those things have been around for a while.

So they’re not going to get you new traffic.

They introduced them a year ago.

I can see traffic popping because it’s new.

But once you’ve had things like that for over a decade, that’s not going to help you with foot traffic.

Yeah.

They probably overbuilt in the United States right now.

They certainly can’t.

Adding stores is not going to add in revenue.

They’re going to start to cannibalize revenue from other stores.

People who own franchises will set their hair on fire if McDonald’s starts to add more locations, particularly near where people have franchises.

So there’s nothing that I see that’s going to significantly change the earnings and revenue profile of McDonald’s right now.

Not unless the teeming masses start saying, wow, this food is really good.

You need to go.

As John Wayne once said, that’ll be the day.

Indeed.

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