McDonald’s blamed a slowing global economy for disappointing quarterly earnings on Monday, warning that declining consumer confidence and rising costs will be a drag on profits this year.
The world’s largest restaurant chain by revenues reported a rare drop in its quarterly earnings, with sales growth slowing around the world. The results failed to meet expectations from Wall Street analysts and shares of McDonald’s closed down 2.88 per cent to $88.94.
The results overshadowed the start of tenure of new chief executive Don Thompson, who has promised anxious investors that the company’s leadership transition will be smooth. Second-quarter net income fell 4 per cent year-on-year to $1.35bn, or $1.32 a share, and revenues were flat at $6.9bn. The consensus earnings-per-share forecast was $1.38.
“As you can clearly see, we are operating in a more difficult global environment,” Mr Thompson told analysts.
The majority of McDonald’s sales come from overseas, making it more vulnerable to the impact of a stronger dollar. In the US, the company continues to cope with stubbornly high unemployment, along with the prospect of rising beef costs due to the prolonged drought.
“Signs of deceleration, notably in the US, have started to materialise,” said Sara Senatore, restaurant analyst at Bernstein Research.
McDonald’s executives pointed to austerity measures in Europe and slowing economic growth in China as points of weakness.
“In China, consumers are reacting with greater caution as the economy has slowed,” Mr Thompson said. “We have seen this particularly in our tier-one cities where we are more heavily concentrated.”
Peter Bensen, chief financial officer of McDonald’s, said that the protracted nature of the downturn has caused structural shifts in the way people eat.
“It is really starting to constrain consumer behaviour,” Mr Bensen said. “In several of the markets there [Europe], the eating out market is just simply declining and people are staying at home. And the magnitude of the issues in Europe are having ripple effects around the world.”
Economic headwinds have tended to benefit McDonald’s, as consumers trade down to its relatively affordable fare. However, the company is facing tougher competition in the US from Burger King and Wendy’s and an increasingly strong rival abroad in Yum! Brands, which operates KFC, Pizza Hut and Taco Bell.
McDonald’s has thrived in recent years by adding higher-end and healthier options to its menu, but Mr Thompson said on Monday that the company would refocus on value to bring in more customers.
“We have to crank up our messaging …just a little bit more to appeal to some of these consumers who have less confidence in the overall economy and therefore, reduced their disposable spending,” Mr Thompson said.
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