McDonald’s: How bad is it?

McDonald's (MCD) reported its third quarter earnings this morning, and though things were very bad, the Street had already been warned to expect as much, as we reported back in September. Revenue came in at $6.99 billion, where analysts were hoping for $7.23 billion. That's a disastrous 30% year-over-year fall. Net Income was a somewhat happier tale, however, as the company post earnings of $1.52 per share on a cost adjusted basis, while the Street had only been expecting $1.37.

The chain is facing a several hurdles simultaneously. Most acute among these is a crushing 9.9% sales decline in Asia in the third quarter, a blow almost entirely self-inflicted by the company's failure to monitor its suppliers, which led to the mortifying revelation that it was serving filthy, expired meat. The company is also dealing with a problem entirely beyond its control – the vindictiveness of Vladimir Putin who has decided to take out his anger with US and European sanctions on the chain. Suddenly, half of the McDonalds stores in Russia are either under investigation or already shuttered by health inspectors.

And if those were the company’s only problems, they could easily be dismissed as temporary issues, but CEO Don Thompson acknowledged that the problems were deeper, and included underperformance in the US market. In a statement, Thompson said, “We must demonstrate to our customers and the entire McDonald's system that we understand the problems we face and are taking decisive action to fundamentally change the way we approach our business.”

But what action? Thompson wants to improve the menu, though he also wants to simplify it, and those goals don't necessarily go hand in hand. He also wants to add customization options to the menu, perhaps using touch-panel screens, but that would be a pretty big technological investment for an idea that may or may not mesh with what the chain can actually serve up. Finally, he wants to add digital payment options, and here, he specifically named Apple's (AAPL) Apple Pay as a possible solution.

All in all, the plan doesn't sound like much of a plan at all. McDonald's is now in decline, and nothing in Thompson's comments offers hope of a turnaround. There is a glimmer of optimism here, but it is for Apple, not McDonald's. MCD stock is in the low $90 range – exactly where it was a month ago, prior to the latest round of bad news, while AAPL stock inexplicably still hovers near $100, where it has been for several months in spite of incredible iPhone 6 sales. MCD stock holders might do well to consider making a change. 

Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

Julian Close

Julian Close

Julian Close became a stockbroker in 1995. In his 20 years of market experience, he has seen all market conditions and written about every aspect of investing. Julian has also written extensively on corporate best practices and even written reports for the United Nations. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.

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