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It’s amazing how deeply embedded some corporate images are in our minds. Just the other day, I was talking with someone in Canada and mentioned “the company with the purple, polka-dot arches.” They knew immediately what company I was referring to – and so did you. Coincidentally, that company, McDonalds Corporation (NYSE:MCD) hit the market headlines this morning as it released its second quarter results. It causes me to wonder how strong its image is as an indicator on Wall Street – and on markets around the world, for that matter – as McDonalds’ share price began falling in early trading by 2.7% to $97.55.
The world-famous restaurant chain lost nearly 20% of the 14% that it had gained this year through last Friday. In a scenario that we have been witnessing quite often lately, the long-time king of the fast food industry watched its share price dwindle even though, from an operational standpoint, the results were at least nominally acceptable.
The Q2 results, reported in constant currencies, cited a 1.0% increase in global sales, a 2% increase in revenues, a 3% increase in operating income, and a 6% increase in diluted earnings per share. Total revenues rose from$6,915 to $7,083 million. Operating income increased from $2,155 million to $2,198 million. Net income expanded from $1,347 million to $1,396 million, with diluted earnings per share up to $1.38 from $1.32.
That’s the overall picture. Once again, however, the company failed to meet market expectations. That is, in part, what is unsettling investors on Wall Street this morning. In some ways it seems like a paradox. Performing well, but failing to meet projections is akin to being the favorite horse in the race, running the race in that horse’s fast time ever, only to come in fourth. People begin to lose confidence in the horse. On the other hand, a company that has struggled to improve is like a long-shot in the same race, expected to finish last in a 10-horse race, but comes in fifth. That horse is still not a winner, but people gain confidence in him because he finished better than their expectations.
But there is another fly buzzing around Ronald McDonald’s head. Sales in Europe lagged during the quarter by 0.1%. That may not seem like much, but it could have been much worse had sales in the UK and Russia not been strong enough to offset Ronald’s falling shorts in France and Germany. Sales also suffered in APMEA countries by close to 3% in constant currencies. A portion of these declines may be blamed on the economy in general, as families around the world cut back on spending their disposable income. Nonetheless, the actual remedies needed may be significantly different in each region or even in each country.
CEO Don Thompson didn’t offer much hope for radical upward momentum in the near future as he said that “While our consolidated results this quarter were positive, global comparable sales for July are expected to be relatively flat. Based on recent sales trends, our results for the remainder of the year are expected to remain challenged.”
It’s been quite some time since McDonalds and other major fast food chains have saturated most markets, changing the competitive face of the industry. Although there is still room for expansion in some countries, the overall strategy of all of them, as Thompson noted is the need for “differentiation“. And that, my firend, is much more difficult than expansion.
One thing is for certain, Ronald McDonald’s smile will eventually turn to a frown if he keeps taking it in the shorts. McDonalds’ share price continued to fall after the market opened to 97.399 at 10:10 am EDT. Now, let’s sit back and watch to see how the purple polka-dot arches performance affects the NYSE and all of the other markets as the world turns today.
