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Will McDonald's Be Able to Execute a Turnaround?

August 12, 2014 | About:
kcpl

kcpl

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McDonald’s (MCD) strength so far has been a cutting-edge menu. But, despite a robust performance by the food company, McDonald’s sales were hit in America and Europe for reasons. Still, McDonald’s focus is on improving the overall customer experience and strengthen its long-term prospects. However, a closer look at the company indicates that it is suffering now. The lawsuit against it in Russia, and the issue of stale meat in its burgers might be hazardous for it.

Not in a strong position

Looking at the financials, McDonald’s quarterly revenue rose by a minimal 1% to $7.2 billion. Though the company saw a slight improvement in its top line and earnings, yet it couldn’t meet analysts’ estimates. Analysts had been modeling McDonald’s to post revenue of $7.3 billion. The company saw a decline in comparable store sales in the U.S. and China, and this has hurt its profit margins. Also, the net income of the company declined to $1.39 billion, which was lower than $1.4 billion last year.

The main reason McDonald's is suffering is due to allegations against it in China that are affecting performance across the globe. The company is facing allegations of violating consumer safety standards. According to recent reports, the meat supplier of McDonald's has been accused of supplying meat beyond its shelf life. This is hurting McDonald’s sales.

Positive steps

Under pressure, McDonald's has recalled beef, pork, and chicken items from its menu in China. In order to regain customer confidence in the brand, OSI Group withdrew all its products manufactured by Shanghai Husi, which is a subsidiary of the U.S.-based company. This scam has led McDonald's to stop giving orders to OSI in China. This became a serious issue and many popular joints such as KFC and Burger King World Wide have announced that they will not buy from OSI in China.

Also, McDonald's was sued in Russia to ban some of its burgers and milk shakes. This can be seen as a reflection of what has happened in China. The Russian safety regulator has questioned McDonald’s food quality, which had been its key growth driver. Such an allegation is expected to hurt its profit and sales. McDonald's should guard its steps and look out for some alternatives as other peers are doing well.

More struggles

Moving on to McDonald’s sales, the company is struggling in the U.S., showing negative comparable sales. Also, in Europe and Russia, sales were badly impacted by the weakness prevailing in China. McDonald's is intent on strengthening the overall customer experience to effectively position the segment for long-term growth, focusing on some key areas including service excellence, enhanced marketing, and value, core menu, and breakfast initiatives.

Besides the weakness, McDonald's also saw good business in the U.K. and France, which delivered solid improvement in sales and operating income. Similarly, the Middle East, Asia-Pacific and Africa are some of the profitable regions on McDonald’s list. Further, it is making advances to strengthen the existing regions. Under this, McDonald's is emphasizing compelling premium menu offers, focusing on core menu and value options, and the rollout of blended ice beverages in several markets. These initiatives are expected to help McDonald's get over the tough times it is going through.

Conclusion

Looking at the fundamentals, with a trailing P/E of 17.4, McDonald's looks decent. The company is making advances for a quick turnaround, but the weakness surrounding McDonald's isn’t showing any sign of fading away as of now. The turnaround might come later, but as of now, McDonald's is under pressure. Investors should stay away from McDonald's until there are any concrete signs of the company making a comeback.


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