McDonald's Reports Weakest Gains Since Early 2003

Despite 'Pirates' Promo, Sales Increase Only 1.9%

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CHICAGO ( -- Not even Johnny Depp could give McDonald's Corp. the lift it needed in July.
McDonald's cited abnormally hot weather as one of the reasons for its slack sales growth in July.
McDonald's cited abnormally hot weather as one of the reasons for its slack sales growth in July.

The fast-food company today reported sales at U.S. stores open more than 13 months grew only 1.9% last month, its poorest showing since the company's turnaround began in April 2003. Analysts blamed hot weather, Happy Meals and a new product gap for its weak domestic showing.

Feeling the heat
While observers expected a slowdown amid restaurant-category weakness, rising gas prices and consumer pessimism, analysts cited scorching July temperatures as the biggest culprit.

"We believe that McD's July deceleration is only slightly industry-related and likely due more to abnormally hot weather," David S. Palmer, analyst with UBS Investment Research, wrote in a note today to investors. He also blamed slightly better sales at rivals Burger King and Wendy's and "less of a Happy Meal boost vs. June."

The results were especially surprising considering the record-breaking performance of McDonald's summer tie-in partner, "Pirates of the Caribbean: Dead Man's Chest," a box-office blockbuster. However, the film was more adult-oriented than "Cars," the child-friendly Walt Disney/Pixar animated film McDonald's partnered with in June.

Surprising vulnerability
McDonald's is the latest among the strongest restaurant players to show surprising sales vulnerability. Banc of America called the July reporting cycle a "time of unprecedented cyclical weakness for restaurants."

John Glass, analyst with CIBC World Markets, said traffic is slipping at McDonald's. He said customer visits made up just one-third of the company's sales gains during the second quarter, compared to two-thirds in the first quarter.

Taco Bell last month reported a 3% decline, its first fall in 43 months, while Panera Bread reported comparable sales grew 1.8% for the four weeks ended July 25. While expected, the result was Panera's weakest since the second quarter of 2004.

Even Starbucks shocked investors when the company reported an increase in same-store sales of 4% for July. Such a figure would be considered healthy for most chains but was the lowest for the coffee behemoth since fiscal year 2002.

Pockets of strength
However, there are pockets of strength. Wendy's reported June same-store sales grew 2.5% and predicted that July comparable sales would be up 3.5%. California Pizza Kitchen posted a 4.8% gain. Chipotle posted a stellar second-quarter same-store sales gain of 14.5%, but that number is down from 19.7% in the first quarter.

Analysts expect McDonald's sales to improve in August with the launch of the $1.29 Chicken Snack Wrap. Sales in Europe continued to show momentum, up 5%.
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