McDonald's brushes off sales hit from E. coli outbreak

McDonald’s executives on Tuesday brushed off a potential sales hit from the deadly E. coli outbreak in the U.S., saying that the fast-food giant was past the incident and was looking to revive muted demand through promotions and value menu items.

Shares of the company reversed course to trade up about 2% in early trading. They had fallen about 2% premarket after the company reported a bigger-than-expected drop in global comparable sales but a quarterly profit beat.

Last week, McDonald’s temporarily paused serving Quarter Pounders in a fifth of its 14,000 U.S. restaurants due to an outbreak that has killed at least one person. Shares had declined nearly 7% last week as infections rose to 75 people. Quarter Pounders were being added back to the menu this week.

CEO Chris Kempczinski apologized to customers for the outbreak on a post-earnings call on Tuesday, and said the situation appears to be contained and he was “confident in the safety of eating at McDonald’s.”

“The most significant events are behind us and the work to do right now is focused on restoring consumer confidence, getting our U.S. business back to that strong momentum,” McDonald’s CFO Ian Borden said on the call.

Slivered onions used in the hamburgers are the likely source of the infection, with the Colorado Department of Agriculture over the weekend ruling out beef patties as the cause.
McDonald’s reaffirmed most of its annual targets including its operating margin, accounting for no material impact from the E. coli outbreak. The company, however, admitted that it was trying to reverse the daily negative guest count and sales since the beginning of the outbreak.

Customer visits in the U.S. fell 6.4%, 9.1% and 9.5% year-over-year on October 23, 24 and 25, respectively, according to a Gordon Haskett note.
In contrast, an outbreak in 2015 for Chipotle led to five quarters of comparable sales declines.

“We think investors will be willing to give the company the benefit of doubt about the impact from the E. coli issue given its handling to date,” M Science analyst Matthew Goodman said.

“Assuming no further issues, we expect investors to be focused on future trends rather than to dwell on the impact of the E. coli issues.”

U.S. sales were a bright spot. In the quarter ended Sept. 30, U.S. comparable sales grew 0.3%, reversing the previous quarter’s drop, aided by promotions.
Weakness in the industry has prompted fast-food chains including McDonald’s, Wendy’s, Burger King and Taco Bell to lean into meal bundles and limited-time offers in a bid to revive traffic, especially among lower-income customers.

INTERNATIONAL MARKETS STRUGGLE

Sales in international markets, however, fell 2.1%, driven by weakness in France and Britain, compared with estimates of a 1.21% drop.

The company’s executives noted that they were not satisfied with the pace of recovery in its major international markets.

Weaker consumer spending in China and impacts of the Middle East conflict have dented McDonald’s business segment where restaurants are operated by local partners, with sales dipping 3.5% compared with a 10.5% rise a year earlier.

“We believe European economies remain under pressure with potential for softer traffic from concerns with war in the Middle East, especially in urban markets, and some pressure on costs from a stronger dollar,” said Jim Sanderson, analyst with Northcoast Research.

Western fast-food chains such as McDonald’s and Starbucks have seen boycott campaigns over their perceived pro-Israeli stance and alleged financial ties to Israel.
The Chicago-based company earned $3.23 per share on an adjusted basis, above analysts’ estimates of $3.20.