McDonald’s E. coli outbreak could worsen near-term sales decline

By Savyata Mishra

(Reuters) – McDonald’s (NYSE:) investors will look for signs of near-term sales disruption from the recent E. coli outbreak linked to its Quarter Pounder hamburgers when it reports third-quarter results on Tuesday.

Last week’s outbreak has killed at least one person, while the number of infections have risen to 75, according to the U.S. Food and Drug Administration. Since then, the shares of McDonald’s have dropped nearly 7%.

“We are concerned that reports of an E. coli outbreak … could pose a major threat to consumer sentiment and McDonald’s U.S. comparable sales,” Baird analyst David Tarantino wrote in a note last week.

The brokerage downgraded the stock to “neutral”, saying the fallout will depend on how long the issue takes to resolve and the media attention it gets.

Slivered onions used in the hamburgers are likely to be the source of the infection, with the Colorado Department of Agriculture over the weekend ruling out beef patties as the possible cause.

The slivered onions were supplied by Taylor Farms, the FDA had said. After a pause in the sale of the Quarter Pounder in a fifth of its U.S. restaurants since Oct. 23, the company said it will be added back to the menu this week.

Some analysts have said the outbreak would not be as severe as prior E. coli outbreaks, including at Chipotle Mexican Grill (NYSE:) and Wendy’s (NASDAQ:).

“While we expect much of the (McDonald’s conference) call’s focus to be on any fallout from the recent E. coli news, we also expect any fallout to be minimal and short-lived,” according to Wedbush.

The burger chain has struggled with weak demand due to low-income consumers paring back fast food spending.

McDonald’s is expected to post a 0.72% drop in global same-store sales in the third quarter, while earnings per share is expected to be $3.20, according to estimates compiled by LSEG.

It had started to see signs of recovery following the launch of its $5 meal deal in June, which has been extended through the end of the year at most of its U.S. locations.

Customer visits to McDonald’s averaged a 0.27% rise through the July to September period, compared to a 2.2% decline in the prior three months, according to data from Placer.ai.

“McDonald’s traffic was anemic before this incident, so any extended negative publicity could only make it more difficult to reignite sales in this environment,” BTIG analyst Peter Saleh said.