Key points
-
McDonald’s shares fell slightly on Tuesday following the release of its third-quarter earnings.
-
The fast food chain beat analyst estimates.
-
He announced that last week’s E. Coli outbreak has been contained and was due to onions, not beef.
The fast-food chain beat estimates for third-quarter earnings and revenue.
McDonald’s (NYSE:MCD) has been dealing in recent weeks with the fallout from an E. Coli outbreak in about 10 U.S. states, including Colorado and Nebraska, caused by sliced onions in its Quarter Pounder burger.
The good news is that the outbreak has been contained and Quarter Pounders will be back on the menu, after being recalled in affected states. But for now they will not include onions.
However, although the outbreak did not affect third quarter sales, the numbers were only acceptable for McDonald’s in the third quarter.
It remains to be seen what impact the outbreak, which occurred last week, will have on fourth-quarter results. It reportedly caused about 75 illnesses, about 22 hospitalizations and was linked to one death. It also led to some lawsuits.
Uncertainty over the possible impact of the E. Coli outbreak likely caused McDonald’s shares to falter on Tuesday, trading at just under $297 per share and mostly flat on the day. They are down about 6% since last week.
Earnings beat estimates
McDonald’s had strong revenue numbers in the quarter, as they increased 3% year-over-year to $6.87 billion. That surpassed estimates of $6.82 billion.
Net income in the third quarter fell 3% to $2.26 billion, while earnings per share fell 1% to $3.13 per share. But on an adjusted basis, earnings were $3.23 per share, which was up 1% year over year and beat estimates of $3.20 per share.
However, there were some mixed results for comparable or same-store sales. Globally, comparable sales fell 1.5% year-over-year, but in the US, they rose 0.3%.
In the US, sales were driven by higher average check growth, partially offset by a slightly negative customer count. A key factor in the US was their $5 value meals and effective marketing.
“We wanted to see three things from the $5 menu: first, improve the brand’s perception around value and affordability; second, make sure it connected with a single user, especially the low-income consumer; and third, a change in customer counts to drive both the short- and long-term health of our business,” CFO Ian Frederick Borden said on the call. “The $5 menu has done just that and continues to attract customers back to our restaurants throughout the quarter, keeping the average check above $10 and being profitable for our franchisees.”
The overall decline was due to weak numbers in international markets, where comparable sales fell 2.1% in internationally operated markets, led by falls in France and the United Kingdom. In international markets with development licenses, sales fell 3.5%, impacted by the war in the Middle East and lower numbers in China.
Overall, revenue at company-owned restaurants rose 4% to $2.66 billion, while franchise revenue rose 1% to $4.1 billion. Operating costs and expenses rose 6% year over year to $3.7 billion, leading to a 1% drop in operating income to $3.19 billion.
“Do this right”
McDonald’s executives began the call by addressing the E. Coli outbreak that occurred last week.
“Although the situation appears to be contained and although it did not affect the third quarter numbers, it is certainly an important development that I know is on the minds of many of you,” President and CEO Chris Kempczinski said on the call.
He said this is McDonald’s first serious public health issue in more than 40 years. The CEO called the situation “heartbreaking for us” and “deeply worrying.” After being informed by the CDC about the matter, they linked the cases to sliced onions from a facility of their supplier Taylor Farm in Colorado. The company stopped sourcing onions from this facility and found no contamination in its beef.
“On behalf of the entire system, we are sorry for what our customers have experienced. We offer our sincerest and deepest condolences, and we are committed to getting this right. One of our core values is doing the right thing, and that has been and will be our guide. as we address this situation,” Kempczinski said.
No material impact
McDonald’s executives said the company was confirming its previous outlook and did not expect any material impact from the E. Coli situation.
However, Kempczinski acknowledged that the company’s performance has been below expectations in 2024.
In an already challenging environment, McDonald’s could face slower sales in the fourth quarter, potentially due to the fallout from E. Coli, which may have impacted traffic.
Given the uncertainties, and the somewhat elevated valuation with a P/E of 26, this is probably a stock to put on the back burner for now.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.