The Fast-Food Fallout: What You Need to Know
May 9th 2012 9:10PM
Updated May 9th 2012 9:12PM
Shares of McDonald's (NYS: MCD) tumbled Tuesday, after the fast-food chain reported same-store-sales estimates that fell short of the Street's expectations. These estimates are a key measure of the underlying health of a company's business, because they don't take into account growth from new store openings. In Mickey D's case, global sales at stores open more than a year rose 3.3% in April, while analysts were looking for a 4.2% increase in the period.
Misery loves companies
The shortcoming in sales even surprised McDonald's, which had predicted an overall gain closer to 4%. While there is no shortage of factors to carry the blame, these are weaknesses that weigh on the fast-food industry as a whole. McDonald's, along with rivals including Wendy's (NYS: WEN) and Yum! Brands (NYS: YUM) , are being squeezed by rising costs amid tough economic conditions.
Wendy's took a hit yesterday, despite turning a profit in its first quarter. The burger chain reported earnings Tuesday at $12.4 million, on earnings per share of $0.03 for the quarter. That's quite an improvement from the same period a year ago, in which Wendy's posted a loss of $1.4 million. Still, the climbing cost of beef took a toll on margins. The company's gross margin dipped 150 basis points to 23.5% and the operating margin fell 10 basis points to 5.3%, compared with the year-ago quarter.
Risky international exposure
In addition to rising commodity costs, slowing growth in Asia presents near-term challenges for global fast-food restaurants like McDonald's, as well as those under the Yum! Brands umbrella, including KFC, Taco Bell, and Pizza Hut. As my Foolish colleague Alyce Lomax points out, the Golden Arches' April sales were weakest in the Asia-Pacific, Middle East, and Africa markets.
Meanwhile, Yum! Brands showed slowing same-store sales last quarter in China, which could be a problem for the chain, considering emerging markets are a key component of Yum!'s growth strategy. However, slowing sales are very different from stalling sales. In fact, the Fortune 500 company has so much faith in Asia that it opened 168 new restaurants in China during the quarter.
Today, one of the world's fastest-growing economies accounts for a whopping 40% of Yum! Brands' worldwide profits. That's a sizeable chunk of the pie that's tied to China -- a country where restaurant margins are being pressured by increasing food and labor costs. Even so, Yum! Brands' figures for its first fiscal quarter didn't look too bad. For the quarter ended March 24, Yum! reported $458 million in net income and $0.96 per share, which is upbeat compared with last year's earnings of just $0.54 per share.
Let's take a look at how these fast-food giants measure up from an investment standpoint.
Chipotle Mexican Grill (NYS: CMG) is in the lead, with shares up more than 51% this year. However, both Mickey D's and Yum! Brands trump Chipotle in terms of margins.
Net Profit Margin (TTM)
While Chipotle has been a Wall Street darling for some time now, the stock's margins are weak compared with industry peers. On top of that, Chipotle doesn't pay a dividend. That's in contrast to the attractive 2.99% dividend yield dished out by McDonald's, followed by Wendy's 1.71% yield, and finally Yum! Brands with a reasonable yield of 1.59%.
Fast-food chains across the board are feeling the heat of rising costs and weakness overseas. For those reasons, I'd hold off on Wendy's for now, as the company faces a tough transitional period. The April comps miss by McDonald's doesn't concern me, though. This is an outstanding business with a delicious dividend that I think should be one of every investor's core holdings. Even if commodity prices continue to climb, I'm confident in McDonald's, Yum! Brands', and Chipotle's ability to charge more to help offset these costs.
It's easy to panic and cash in your chips when others are selling. But it isn't smart. Foolish investors know there's value in patience, which is why I think these are still great companies that deserve a spot in your portfolio. While McDonald's boasts a dividend yield of nearly 3%, it isn't the only reliable stock that's rewarding shareholders. Find out how you can Secure Your Future With 9 Rock Solid Dividend Plays in this free report from The Motley Fool. The Fool's leading analysts will reveal the stocks you need to make money and beat the market. Get instant access to the report before it is too late -- it's free.
At the time this article was published Fool contributor Tamara Rutter owns shares of McDonad's. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of McDonald's, Yum! Brands, and Chipotle Mexican Grill and creating a bear put spread position in Chipotle Mexican Grill. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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