Why McDonald's is giving investors indigestion

Perhaps no American company is more iconic than McDonald's (MCD). And in recent years, few major U.S. companies have struggled more to live up to its legacy than the Golden Arches.

A combination of botched product launches, heightened competition for the fast-food (also called quick- service) diner and a growing interest in healthier dining options has sent the burger chain into a tailspin. In November, so-called same-store sales at McDonald's -- a key retail metric that measures performance at stores open at least a year -- suffered their biggest U.S. decline in more than a decade. The 4.6 percent drop was far worse than the 1.6 percent analysts had expected.

When the Oakbrook, Illinois-based company reports earnings on Friday, it's expected to report its first decline in domestic sales in at least 30 years, according to Nation's Restaurant News.

Along with declining sales having to cope with Americans' changing eating habits, Wall Street appears to be losing patience with CEO Don Thompson as he tries to win over younger consumers, many of whom are flocking to healthier fare sold by rivals such as Chipotle (CMG).

Thompson also needs to quell discontent among franchisees unhappy with a bloated menu chock full of poor-selling items and with what they see as rising fees coming from corporate.

"They will likely have to focus on morale of their franchisees and on staying true to their brand by marketing that made them the largest restaurant brand in the world," said Darren Tristano, an executive vice president at Technomic, a restaurant industry research firm, in an email. "With stronger economic indicators leaning toward better performance in 2015, there are no excuses for them not to perform this year."

McDonald's shares have slumped 4.5 percent over the past year, underperforming both the Standard & Poor's 500 index, which rose 8.7 percent over that period, and rivals such as Jack in the Box (JACK) and Wendy's (WEN), whose shares have surged by double digits.

Last year, activist investor Jana Partners, which pressed for change at Walgreen (WAG) and Petsmart (PETM), took a small position in McDonald's. Rumors that hedge fund tycoon William Ackman and other shareholders seeking change at the home of Ronald McDonald would buy the stock have proven unfounded. But Ackman recently did make comments critical of McDonald's and owns shares of Burger King Parent Restaurant Brands International (QSR).

Thompson is trying to address the company's problems. In a statement accompanying McDonald's third-quarter earnings, he said: "We recognize that we must demonstrate to our customers and the entire McDonald's system that we understand the problems we face and are taking decisive action to fundamentally change the way we approach our business."

To that end, he's focusing on improving the customer experience. Like many other consumer-oriented companies, McDonald's is boosting its technological capabilities in areas such as mobile ordering. In 2,000 of its locations the chain also plans to let customers customize their burgers and other sandwiches.

In another step to boost its appeal, McDonald's will also slim down its menu in response to consumer complaints about poor service.

A company spokesperson couldn't immediately be reached for comment.

While these changes are welcome and perhaps even overdue, Morningstar analyst R.J. Hottovy noted that changing the direction of such a gigantic company takes time. Missteps like McDonald's ill-fated Mighty Wings haven't helped, either. Mighty Wings sold so poorly that the chain was forced to slash prices to clear out unsold inventory.

Said Hottovy, "There are still a lot of questions about whether they can turn around this business."