McDonald’s profit drops 30 percent in the third quarter on worsening U.S. and global sales

The fast-food giant's shares plunged on Tuesday with the release of its third quarter earnings.
The fast-food giant’s shares plunged on Tuesday with the release of its third quarter earnings.

By Brittany Magee

McDonald’s shares plummeted Tuesday, after the fast-food giant reported a worse-than-expected third quarter profit decline of 30 percent, driven by wide-ranging problems at home and abroad.

For the quarter ended Sept. 30, net income at the Oak Park, Ill.-based company fell to $1.07 billion, or $1.09 a diluted share, from $1.52 billion, or $1.52 a diluted share, in the same quarter a year earlier.

“By all measures our performance fell short of our expectations,” said McDonald’s President and Chief Executive Officer Don Thompson in a press release Tuesday. The company also said sales in October would likely decline.

“With management’s outlook for negative comparable sales in October (which we expect to extend well into 2015), it’s clear that recent menu and marketing initiatives have not had the success management anticipated,” said R.J. Hottovy, an analyst at Morningstar Inc., in a note to clients.

Third quarter revenue fell 5 percent to $6.99 billion from $7.32 billion a year ago.

“Although expectations for McDonald’s were low,” Hottovy said, “the third-quarter update paints a picture of a company struggling to keep pace with evolving consumer tastes and a competitive global restaurant landscape.”

Even with a strong performance in the U.K., third-quarter sales in Europe dropped 1.4 percent. A slowed economy in Germany and tensions in Russia and Ukraine created a difficult market for the fast-food chain.

Sales in the Asia/Pacific, Middle East and Africa region fell 9.9 percent, due in large part to a scandal in China last month in which Chinese authorities accused a McDonald’s meat supplier of packaging expired meat. The company has since struggled to gain back customer confidence in Asia.

In the U.S., McDonald’s most crucial market, sales fell 3.3 percent because of a decline in guest traffic and younger generations’ taste for other food options in the highly competitive fast-casual dining segment.

McDonald’s plans to drive U.S. sales with a shift in its focus to the local community, implementing new initiatives including a “simplified menu” that will feature “locally-relevant menu options,” according to the company’s press release.

The world’s largest fast-food chain will look to boost its international sales by making changes to the menu and revamping the customer experience.

Even with a strategy for significant change, McDonald’s recognizes the challenges ahead.

“The internal factors and external headwinds have proven more formidable than expected and will continue into the fourth quarter,” Thompson said. “We recognize that 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.”