McDonald’s credit rating downgraded over sales concerns

Fitch Ratings cites softening trends for lower rating

Fitch Ratings downgraded McDonald’s Corp.’s credit rating on Monday, saying the burger giant’s weak traffic could lead to further erosion of share in the competitive U.S. restaurant market.

The agency lowered McDonald’s long-term Issuer Default Rating to BBB from BBB+.

The ratings agency said that, while McDonald’s same-store sales have improved since the fall of 2015, “Fitch does not view recent performance as sustainable.” The agency believes the Oak Brook, Ill.-based burger giant “will continue to lose share over the medium term.”

McDonald’s same-store sales increased 1.3 percent in the U.S. in the quarter ended Sept. 30, the fifth straight quarter in which the chain reported an increase in the key metric following more than two years of weakness.

Yet that increase was due in large part to pricing of 3.5 percent, meaning traffic was down by at least 2.2 percent in the period.

In addition, Fitch noted that McDonald’s “gap” in same-store sales with its competitors narrowed to 0.6 percent from 2.9 percent.

Fitch believes that McDonald’s softening domestic same-store sales are due to that higher pricing. In addition, the agency cited a “recent slowdown in the broader industry, heightened competition, and growing consumer preference for freshly prepared food at a good value.”

McDonald’s weakness in recent years has come amid intense competition in the domestic market, thanks to the growth of better burger chains and the improvement in sales at its traditional quick-service competitors.

Fitch believes these other companies will continue to grab market share away from the industry’s biggest restaurant chain.

“Fitch believes McDonald’s will continue to gradually lose share over the medium term in the U.S. due to increased choices for consumers, stemming from the growth of specialty burger shops like Shake Shack and Five Guys, and some weakening in McDonald’s brand perception within the hamburger category and among younger and health-conscious consumers in recent years,” the agency wrote.

Fitch’s downgrade comes a year after the major debt ratings agencies lowered McDonald’s rating after the company decided to issue more debt to pay dividends to shareholders.

McDonald’s is working to reverse traffic trends, with a revolving set of items on a discounted “McPick” menu, a doubling down of its All-Day Breakfast strategy and, coming next year, new sizes of Big Macs — a Jr. Big Mac and a third-pound Grand Mac.

McDonald’s stock rose nearly 2 percent in morning trading Monday. Yet it is down 14 percent since peaking at nearly $132 a share in May.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

TAGS: Sales Trends
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