McDonald's earnings ugly; shares fall

McDonald's seems to have lost its secret sauce.

Shares of the world's largest burger chain (MCD) closed down 0.6% Tuesday after the company announced disappointing third quarter results marred by a decline in revenues, operating income and earnings per share. Shares were down 58 cents at $91.01.

Perhaps most troubling of all: Global comparable sales dropped 3.3%, the company said, reflecting a decline in guest traffic in all major segments — along with the continued impact of previous meat supplier issues in Asia.

"By all measures, our performance fell short of our expectations," said CEO Don Thompson, in a statement. He said the third-quarter results "reflect a significant decline vs. a year ago." He faulted several things, including a higher effective tax rate, "unusual events" in Asia and Europe and "under-performance" in the U.S. market.

Third-quarter earnings fell a worse-than-expected 30%. McDonald's reported a profit of $1.07 billion, or $1.09 a share, vs. $1.52 billion, or $1.52 a share, a year earlier.

"McDonald's third-quarter results reflect a significant decline versus a year ago, with our business and financial performance pressured by a variety of factors," Thompson said.

In the USA, third-quarter comparable store sales decreased 3.3% driven by negative guest traffic. The company said that new U.S. president Mike Andres is moving to quickly implement new initiatives.

But in a conference call, Thompson said changes are coming sooner than later in the U.S. market in particular. The so-called "Create Your Taste" platform that allows customers to customize every facet of their sandwich will soon spread beyond its limited test in Laguna Niguel, Calif., and will be "fully activated" in three other markets by the third quarter of 2015, Thompson said.

At the same time, local and regional franchisees will have new powers to sell items that specifically appeal to their own markets, Thompson said. For example, the Chorizo Burrito is a regional menu item currently in test in about 2,000 restaurants in Texas, Hawaii and the Midwest. "There will be a stronger balance between regional and national" items, Thompson said.

Even then, analysts were unimpressed. In a note to investors, analyst John Glass of Morgan Stanley said that McDonald's third quarter results "disappointed across the board, even against muted expectations."

For McDonald's, the news keeps getting more bleak. Back in August, it reported its worst monthly sales results in more than a decade. The chain has been slow to create new products and new marketing that appeal to Millennials who broadly opt for healthier food with ingredients they trust. Last week, McDonald's even unleashed a new, documentary-style online campaign targeting Millennials that went inside a meat supplier plant and assured consumers there was no "pink slime" in its beef.

Thompson, in his statement, 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."

Thompson said the company has lost relevance with key customers and must bolster its menu. Many of those customers are opting to go to places such as Chipotle and Panera, where their offerings are widely viewed as better for you. Chipotle reported third-quarter comparable store sales up 19.8% and net income up 56.9% after the market closed on Monday, but its stock took a hit because of projected higher costs of food.

Near the end of the conference call, Thompson was asked to comment on the scathing critique that Chipotle CEO Steve Ells gave the conventional fast-food industry during his own conference call late Monday. "The traditional fast-food sector has traded food quality and taste for low-cost and ease of preparation," Ells said.

But Thompson wouldn't take the bait.

"I would not say that Steve (Ells) is wrong or right. Each organization has to look at it through the eyes of its customers," said Thompson.

Even then, Thompson noted, if organic food continues to increase in popularity "we'll look at it more aggressively."