McDonald’s (MCD) and the Incredibly Shrinking Revenues

The incredibly shrinking revenues have returned to McDonald’s (MCD). Notably, McDonald’s revenues shrank by 6.69% during 3rd Quarter 2018.

Disturbingly, that was actually an improvement over 2nd Quarter 2018 when revenues shrank by 11.5% at McDonald’s. In addition, 3rd Quarter 2018, was the 9th straight quarter with a negative revenue growth rate at McDonald’s.

Thus, McDonald’s (NYSE: MCD) is incapable of revenue growth. However, Mickey D’s is still a profitable company that makes a lot of money.

McDonald’s (MCD) is still making money

For example, McDonald’s experienced a gross profit of $2.822 billion on revenues of $5.369 billion for 3rd Quarter 2018. Moreover, McDonald’s records an operating income of $2.417 billion and a net income of $1.637 billion for 3rd Quarter 2018.

In addition, McDonald’s achieved an operating cash flow of $2.471 billion and a free cash flow of $1.778 billion on September 30, 2018. Hence, McDonald’s is still generating a lot  of cash from its business.

McDonald’s is keeping some of that cash in the form of $2.575 billion in cash and equivalents recorded on September 30, 2018. Therefore, McDonald’s still makes money despite the revenue collapse.

Why are McDonald’s (MCD) Revenues Shrinking?

Strangely, McDonald’s (MCD) revenue growth is reporting growth in same-store sales as its revenue growth falls. For instance, McDonald’s reports U.S. same-store sales grew by 2.4% and global sales grew by 3.6% in 3rd Quarter.

I guess giveaways and discounts are driving McDonald‘s sales growth. For example, the free food McDonald’s gives away through its app. There are also the deals such as discounts on burgers on customer appreciation Wednesday’s.

Thus, it looks as if the only way McDonald’s can get people to eat its food is to give it away. The obvious problem is that McDonald’s has to eat the cost of that food.

Logically, a greater dilemma is the limits of promotions. To explain, there are only so many people willing out of their way for a free or cheap burger. Once, McDonald’s has reached all those customers it will need a news business plan.

The Real Problem at McDonald’s (MCD)

The true problem that McDonald’s (MCD) faces is that its business model is easier to replicate.

To clarify, McDonald’s real product is not burgers but consistency. McDonald’s succeeded by offering consistent food in a consistent environment.

The burgers and fries were never that good, but they were always consistent. Moreover, McDonald’s always cooked and sold those burgers in a clean environment.

Okay, this does not sound like a big deal today, but it was back when Ray Kroc first franchised McDonald’s. In particular, McDonald’s competition was the the seedy corner diner with the cigar-chomping cook in the stained t-shirt. Offering food cooked in a clean and reasonably sanitary environment was a revolutionary disruption back in the 1950s and 1960s.

The problem for McDonald’s is there is no way to patent consistency and cleanliness. Any reasonably managed restaurant can replicate those attributes. All a competitor requires for duplicating McDonald’s system is a little discipline and smart oversight.

For example, there are now hundreds of fast-food chains in America. All of them sell reasonably consistent food in a fairly consistent environment. Hence, there is nothing special or unique about McDonald’s in most areas.

Amazon is coming for McDonald’s (MCD)

McDonald’s faces a double-sided threat in the United States. First, it must deal with hundreds of direct competitors.

Notably, almost every corner in every city in North America has two or three fast-food joints. In many cases, a hungry person has to pass several fast-food outlets to reach McDonald’s.

Second, McDonald’s now faces serious competition from supermarkets, Walmart (NYSE: WMT), convenience stores, and even Amazon (NASDAQ: AMZN). For example, Amazon’s Go cashierless convenience store sells a wide variety of readymade food.

In detail, Go is selling salads, sushi, sandwiches, soups, and other items. Many of those items sell for the same price as a Big Mac.

Unluckily for McDonald’s, Amazon Go is the latest entry in a crowded ready to eat market place. Kroger (NYSE: KR), in particular, has been pushing a wide variety of hot and cold ready to eat foods through its supermarkets for years.

Markedly, some Kroger Marketplace stores contain pizzerias, Asian cafes, and even cheese sandwich restaurants. Nor is Kroger alone, Amazon subsidiary Whole Foods sells an incredible variety of ready to eat foods.

This ready to eat revolution is a direct threat to McDonald’s because it offers a wide variety of consistent food at a competitive price. In addition, the ready to eat food is every bit as a fast and convenient as McDonald’s.

Will GrubHub Destroy McDonald’s (NYSE: MCD)

A greater danger from the ready to eat revolution is food-delivery apps like GrubHub (NYSE: GRUB) and UberEats.

The threat from food-delivery apps is that make any food more convenient than a McDonald’s hamburger. For example, sushi and Thai curry are now as close as your phone through GrubHub.

My prediction is that McDonald’s will continue to shrink but keep making money. In particular, McDonald’s dividend is safe.

McDonald’s (MCD) is Still a Good Dividend Stock

Strangely, McDonald’s is still a great dividend stock despite the revenue collapse.

Notably, McDonald’s (MCD) paid a $1.16 a share dividend on 17 November 2018. Additionally, McDonald’s shareholders are enjoying a dividend yield of 2.49%, an annualized payout of $4.64, and a payout ratio of 60.7% on 18 November 2018.

Finally, McDonald’s shareholders have enjoyed 41 years of dividend growth. Under these circumstances, McDonald’s is worth the $186.72 share price reported on 18 November 2018.

However, investors should be ready to sell McDonald’s (MCD) quickly. The revenue decline shows McDonald’s could collapse or run out of money any time.

Buy McDonald’s for the dividend, but be leery of it. Be wary because the Golden Arches are on very shaky ground financially.