RBC cuts McDonald’s price after value menu fails, stock registers record fall

Call it weird or illogical! An ambitious discount offer has turned ominous for fast food chain McDonald’s, when analysts cut the company’s price target following an unimpressive start to the ‘Dollar Menu’ it rolled out in January.

The stock closed nearly 5% lower on the last trading day, marking the biggest fall since it started trading more than 50 years ago and the worst percentage drop since the 2008 crisis. The decline pared some of the much-needed gains registered by the Dow Jones Industrial Average, after a 1.6% intraday dip induced by trade war fears.

The setback comes amidst widespread softness in comparable store sales across the retail industry, especially the food sector that is reeling under competitive pressures. According to market watchers, the muted customer response to McDonald’s low-price menu indicates that the pressure on disposable income is worse than thought earlier.

The stock started falling soon after RBC Capital Markets reduced the price target to $170 from $190, and lowered business outlook for the Dow component, citing muted customer response to the recently launched $1 $2 $3 menu. The first-quarter US comparable store sales growth forecast was lowered to 1%from 3.5% and full year earnings outlook to $7.43 per share from $7.60 per share.

“We significantly lower our [same-store sales] expectations due to deteriorating industry conditions and a disappointing early sales impact from the $1, $2, $3 value menu,” said a statement from RBC Capital. Analysts, meanwhile, expressed hope that the burger giant has the potential for a course correction in the longer term and would return to a high growth trajectory.

The decline pared some of the much-needed gains registered by the Dow Jones Industrial Average

A section of market watchers attributed McDonald’s slowdown more to seasonal factors and unfavorable weather conditions than its fundamentals, and hoped things would stabilize between the second quarter and fourth quarter.

The positive wage and employment data point to a potential rebound in consumer spending in the near term, pumping more vigor into the marketplace.  It is believed that McDonald’s aggressive digital initiatives and promotional activities, combined with new product launches, could help it regain the lost glory.