18 Jul

Must-know: McDonalds’ risks


McDonalds’ risks

While the restaurant industry, which can be accessed through the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) and the PowerShares Dynamic Food & Beverage ETF (PBJ), is susceptible to a wide array of risks of macro and micro factors. As a huge global brand, McDonalds (MCD) faces unique risks. Let’s look at some of them below.

Must-know: McDonalds’ risks

Operational risk

There have been several labor strikes and protests against McDonalds by its workforce relating to matters such as increasing minimum hourly wages and the right to unionize. The Guardian reported the most recent protest occurred on May 21, 2013 in Chicago. Strikes have also taken place against Yum! Brands (YUM) and Burger King (BKW) according to Investors.com and the Huffington Post, respectively.

Currency risk

At the end of 2013, McDonalds had 40% of its debt denominated in foreign currency. The Euro, Australian Dollar, British Pound, and Canadian Dollar represented 65% of McDonalds operating income over the same period. The management estimates about $0.25 change to the earnings per share if any of these currencies moved even by 10%. A $0.25 change would be a 20% change in the earnings per share (or EPS) of $1.21 as of the quarter ending March, 2014. Compared to other risks, financial risks can be mitigated through various hedging instruments. Sometimes these risks are mitigated due to natural hedging—if the revenues declined, the costs would also decline.

Legal risk

Operating in developed markets like the U.S. and Europe, McDonalds faces tighter regulations. Some regulatory changes include printing nutritional content on items, product packaging, taxation, and marketing to the children. This could translate into higher costs of compliance. For example, effective January 1, 2012, McDonalds had committed itself to The EU Pledge, in which it would fulfill nutritional criteria for items advertised to kids under the age of 12. In the same effort McDonalds also committed to not engage in communication to primary schools in Europe.

Reputation risk

There have been several studies and some criticism surrounding McDonalds, on a broad range of topics such as food quality and treatment of employees. All of these contribute to changes in consumer perception of McDonalds and the food it serves. Trends in food habits, such as a move towards a healthier menu, also impact sales when McDonalds can’t keep up with the demands. Introducing a healthier menu and changing the image from a junk food restaurant to a healthy food restaurant poses a huge risk due to customer’s set perception about McDonalds. Also, a lot of the marketing budget is already committed to the existing items.

Latest articles

Broadcom (AVGO) stock fell ~8.5% after markets closed yesterday following the semiconductor giant's fiscal 2019 second-quarter earnings release. It missed analysts' revenue estimate and cut its fiscal 2019 revenue guidance by $2 billion to $22.5 billion due to sluggishness in its semiconductor solutions business.

The SPDR Gold Shares ETF (GLD), which tracks physical gold prices, has underperformed the broader markets year-to-date, rising just 4.4% compared to the S&P 500’s (SPY) gain of 15.9% as of June 14. The sentiment for gold, however, has been turning around.

Safe havens such as Treasuries and gold were back in favor on June 14 as stocks fell due to rising tensions in the Middle East, concerns over growth, and the looming threat of the US-China trade war. The tech-heavy Nasdaq Composite Index fell 0.67% in the first hour of trading.

Lululemon (LULU) stock rose 2.1% on June 13 in reaction to better-than-expected first-quarter results and an upgraded outlook for fiscal 2019 overall. The company's first-quarter adjusted EPS grew 34.5% to $0.74 on revenue growth of 20.4% to $782.32 million. Analysts had expected EPS of $0.70 and revenue of $755.31 million. Here's why the outlook got an upgrade.

14 Jun

IEA Again Slashes Its Oil Demand Growth Estimate

WRITTEN BY Rabindra Samanta

As of 4:40 AM Eastern Time today, US crude oil active futures were at $51.83, ~4% below their closing level in the previous week. If US crude oil prices stay at those levels today, they'll mark their third week of decline in five weeks.

14 Jun

Why Kimberly-Clark Stock May Stop Rising


Kimberly-Clark (KMB) stock has risen 20.5% this year, boosted by the company’s better-than-expected sales and earnings during its last reported quarter. However, its stock could stop climbing. Here's why.