It is working for the shareholders. Just not working for the operators.
WHY is MCD stock so high????Top-Line Downtrend Persists: McDonald’s revenues have been weighing on the company’s performance for quite some time. In the third quarter of 2018, the company’s revenues declined 7% year over year, following a 12% and 9% fall in the second and third quarter of 2018, respectively. Further, the top line had declined 11.4%, 13%, 7% and 4.7% in the fourth, third, second and the first quarter of 2017, respectively. This downturn reflects the impact of the company’s strategic refranchising initiatives. During the reported quarter, the company-operated restaurants’ revenues declined 18% year over year to $2,511 million. However, the same at franchise-operated restaurants improved 6% to $2,858.4 million. Also, earning estimate for 2018 and 2019 have remained stable, limiting the company's upside potential. •Margin Pressure: Of late, McDonald’s margins have been under pressure from worldwide wage increases. Meanwhile, apart from minimum wage increases, additional health care costs related to ‘Obamacare’ in the United States also raise labor costs. Further, costs associated with brand positioning in all the key markets as well as ongoing investments in initiatives would continue to weigh on margins, at least in the near term. Increased commodity costs may further put the pressure on margins. In the third quarter, consolidated company operated margins contracted 70 bps to 18.4% due to continued labor as well as commodity pressures across the major markets. •Negative Currency Translation: With about 40% of McDonald’s operating income coming from the international lead segment and over 10% from the high-growth markets, its earnings remain vulnerable to negative currency translation. In third-quarter 2018, currency translation impacted the results by 5 cents. •Cutthroat Competition: Competition among fast-casual restaurants is expected to remain fierce with respect to price, service, location and concept, which may adversely impact McDonald’s restaurant operating margins and profits. The company is facing competition from Wendy’s that operate under almost similar business models and offer similar products. Chipotle Mexican Grill, a provider of healthier menu options, poses significant competition for McDonald’s, especially when consumers in the United States are opting for healthier menu options instead of fast food. Moreover, other restaurateurs like Yum! Brands, Inc.’s Taco Bell, Dunkin' Brands Group, Inc. and Jack in the Box Inc. are also cashing in on the popularity of the breakfast platter thereby giving McDonald’s a run for its money in this space also.
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