McDonald's Braces for Impact of E. Coli Outbreak on Q3 Results
McDonald's Corporation (NYSE:MCD) is facing a potential hurdle ahead of its third-quarter earnings announcement on Tuesday. Investors and analysts are closely monitoring the effects of a recent E. coli outbreak. According to a report from the U.S. Food and Drug Administration, the outbreak linked to the fast-food giant's Quarter Pounder burgers has resulted in at least one death and 75 infections.
The incident last week led to a nearly 7% drop in McDonald's shares. Baird analyst David Tarantino expressed concerns that the outbreak could significantly impact customer perception and the company’s U.S. comparable sales. Consequently, the brokerage downgraded McDonald's stock to a "neutral" rating, noting that the duration of the issue and the level of media attention would determine the extent of the impact.
Investigations have pointed to chopped onions as a potential source of contamination, while the Colorado Department of Agriculture has ruled out ground beef as a cause. The onions in question were sourced from Taylor Farms. Following the outbreak, McDonald's halted Quarter Pounder sales at approximately 20% of its U.S. locations starting October 23. The company announced plans to reintroduce the menu item this week.
Despite current concerns, some analysts believe the impact of the outbreak on McDonald's may not be as severe as previous E. coli incidents experienced by other fast-food chains like Chipotle Mexican Grill (NYSE:CMG) and Wendy's (NASDAQ:WEN). Wedbush analysts predict that any negative effects stemming from the E. coli reports will be minimal and short-lived.
McDonald's is grappling with weak demand, particularly due to lower-income consumers reducing fast-food spending. According to LSEG forecasts, the company is expected to report a 0.72% decline in global same-store sales in the third quarter and earnings of $3.20 per share.
In a bid to boost sales, McDonald's launched a $5 meal campaign in June, which has been extended at most locations in the U.S. through the end of the year. Data from Placer.ai indicates that this initiative has begun to show signs of success; customer visits increased by an average of 0.27% during the July-September period, compared to a 2.2% decline in the previous three months.
However, BTIG analyst Peter Saleh pointed out that McDonald's traffic was stagnant even before the E. coli outbreak, suggesting that prolonged negative publicity could make it even more challenging for the company to revitalize sales in the current market environment.