Fitch downgrades McDonald's ratings
Nov. 8, 2016
by Erica Shaffer
Search for similar articles by keyword: [McDonalds
Ratings agency believes boost from All-Day Breakfast is unsustainable.
CHICAGO – Fitch Ratings downgraded several ratings for McDonald’s Corp.
Fitch downgraded the chain’s long-term IDR to ‘BBB’ from 'BBB+'; bank credit facilities to ‘BBB’ from 'BBB+’; and senior unsecured debt to ‘BBB’ from ‘BBB+’. The agency said it does not expect the quick-service chain to reduce its debt or sustain the momentum of All-Day Breakfast.
In the most recent quarter, McDonald’s reported a 3.5 percent increase in global comparable sales and a 1.3 percent increase in US comparable sales. Driving the acceleration in sales were the chain’s All-Day Breakfast, McPick 2 platform and the introduction of chicken McNuggets with no artificial preservatives. But Fitch is unconvinced the momentum will continue to drive sales growth.
“…while US comps have improved since the fall of 2015, due in part to better store-level execution and the launch of All-Day Breakfast, Fitch does not view recent performance as sustainable,” Fitch explained. “According to Bloomberg data provided by Euromonitor International, McDonald's has gradually lost share to improving quick-service competitors and fast-casual operators in the US limited service restaurant industry since 2012. Fitch believes McDonald’s will continue to lose share over the medium term, although quarterly volatility in share trends is anticipated, due to heightened competition and changing consumer preferences.”
Fitch attributed softening comparable sales at McDonald’s to higher pricing that led to declines in guest traffic in addition to a recent slowdown in the broader foodservice industry, heightened competition and growing consumer demand for fresh food offerings at value prices.
“McDonald’s is responding to changing consumer preferences by emphasizing food quality,” Fitch said. “The company is also emphasizing value with its McPick2 platform and investing in the McDonald’s Experience of the Future to enhance the customer experience. However, Fitch believes McDonald’s will continue to gradually lose share over the medium term in the US 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.”
In McDonald’s international segment, Fitch expects global comparable sales to rise to 3.5 percent this year before declining to around 2 percent in 2017 and 2018. “International markets are expected to continue to outperform the US where Fitch expects less pricing and potentially weaker guest count trends,” the ratings agency noted.