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Mc Donald’s First Step to a Turnaround

August 09, 2014 | About:
Suravi Thacker

Suravi Thacker

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There is a host of problems hovering on the fast food restaurant chains. As a result, each of the retailers is having a difficult time as they are losing on its customer base. The most important of all is the food inflation. Rising meat prices have forced people to avoid meat consumption and shift to cheaper options. On the other hand, it has shot up the cost structure of such retailers.

Further, minimum wage protests by employees in the fast food industry have played a major hurdle for such companies in the last few months. All these factors together dragged Mc Donald’s (MCD) results down. Its second quarter results were below the Street’s expectations, enabling its share price to fall.

A lot of missteps indeed

Revenue inched up slightly to $7.18 billion from $7.08 billion in the previous year. This increase was mainly because of the recently ended FIFA World Cup 2014, held in Brazil. Mc Donald’s was one of the major sponsors of the event, which helped in marketing the retailer largely. However, same store sales were flat, since decline in America and Europe was offset by growth in Asia and Middles East, especially China.

Same store sales in the U.S. dropped 1.5% and that of Europe declined 1%. Since U.S. makes 30% of total revenue, fall in sales from this region hurt the retailer badly. On the contrary, the same metric for the Asia, Middle East and African region grew 1.1%. Earnings also improved slightly to $1.40 per share from $1.38 per share, last year.

A blow came to all the fast food retailers when US food supplier OSI Group was investigated and shut down recently. The retailer is accused of mixing expired meat with the fresh product. This has raised concerns over quality of Mc Donald’s as well as peer Yum! Brands (YUM), since they get their meat supplied from China.

This has forced many consumers to shift to casual food restaurants such as Chipotle Mexican Grill (CMG). In fact, Chipotle has gained a lot of popularity because of its innovative menu of offerings and good quality food served to consumers. This enabled the retailer to post a blockbuster second quarter, registering a 29% jump in revenue and 17.3% surge in same store sales.

Even Yum! Brands’ second quarter results were decent with a 6% surge in top line and 34% rise in profits. Yum! Brands’ Taco Bell is one of the toughest competitors of Mc Donald’s since both provide a host of breakfast items to the consumers. Mc Donald’s did lose its sales to Taco Bell, resulting in a 2% growth in Taco Bell’s same store sales.

Efforts

Nonetheless, Mc Donald’s has finally decided to fight with the prevailing situation. It plans to now remain focussed on improving its service, especially during the peak hours. It will be simplifying its menu, which was cluttered due to too many items added recently. Also, it will improve staffing. Further, the food retailer plans to engage customers digitally. Also, the company plans to refranchise 1,500 restaurants by 2016, which should help in reducing costs.

Winding up

Mc Donald’s has made a number of mistakes which have weighed heavily on its results. Its inability to fight rising costs, providing an improved list of offerings and good service have forced consumers to switch to other fast food chains and casual restaurants. However, the aforementioned efforts should help the company stage a comeback. Also, the retailer announced that it plans to return $18 billion to $20 billion to shareholders by 2016. The returns will be made in the form of buybacks and dividends. This provides a ray of hope its investors. Therefore, investors can give this company a serious thought.


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