The fast food giant, McDonald's (MCD, Financial), seems to be reeling under the pressure of several headwinds and intense competition in its segment; at least this is something that is clearly portrayed in the third-quarter results that were dramatically down and send negative vibes to the investors. Even CEO Don Thompson looks concerned with the struggling fast food behemoth as he stated during the earnings call- “McDonald’s third-quarter results reflect a significant decline versus a year ago, with our business and financial performance pressured by a variety of factors – from a higher effective tax rate to unusual events in the operating environments in APMEA and Europe to underperformance in the U.S., our largest geographic segment.” So, what did the results say about McDonald’s future? Let’s dig into McDonald’s financial playbook to derive the answer. Here we go.
The quarter glance
McDonald's seems to have lost its secret sauce as its global and U.S. sales each dropped 3.3% over the quarter compared to a year ago, reflecting the decline in almost all of the major markets. Quarterly earnings fell to $1.07 billion, or $1.09 per share, from $1.52 billion, or $1.52 a share, reported a year earlier.
The management stated that there were three factors that led to this sales decline – higher effective tax rate, underperformance in the U.S. market and unusual events in Europe and Asia.
Consolidated revenues decreased by 5%, partly due to the impact of the supplier issue that happened early this quarter in China which has pulled down sales in the country by a considerable extent as the trust factor is hit hard after the incident.
Operating income declined 10% from the year-ago period in the U.S., driven downwards by the initiatives made to address the current market dynamics not translating into improved financial results for the fast-food retailer. The operating income also plunged 2% in Europe where continued headwinds in Russia, Ukraine and ongoing weakness in Germany took a toll on the results. APMEA’s third-quarter operating income declined by a whopping 55% primarily due to the profits being badly hurt in China, Japan and other related markets.
Speaking on the management outlook for the upcoming fourth quarter, Don Thompson painted a dim picture, saying, “We began 2014 mindful of the challenges we faced in driving sales and profitability. The internal factors and external headwinds have proven more formidable than expected and will continue into the fourth quarter, with global comparable sales for October expected to be negative. These significant challenges call for equally significant changes in the way we do business. In the U.S., we are driving decision making from headquarters back into the field, where our restaurants serve the daily needs of our customers in their local communities. In our international markets, we are taking action to restore customer trust and regain business momentum. We understand the depth of the challenges and we are responding with the sense of urgency required to improve our performance."
The future strategies
The restaurant chain appears to be simply struggling to maintain its relevance with millennials, a key consumer group, who are moving themselves from McDonald's to fast-casual chains such as Chipotle (CMG, Financial), which has shown explosive growth in the third quarter. Also, the honcho is under immense pressure in the Eastern region where the scandal in China has taken a heavy toll on its third-quarter sales. Keeping these recent incidents in mind, McDonald's has rolled out some initiatives which include an aggressive push into breakfast, plus beefed up customer service during busy hours. To keep its sales ticking higher, the fast food giant is also trying to simplify and somewhat customize its menu as per customers’ requirements. That aids in competing with Chipotle, which has taken a similar approach in luring customers and grabbing a portion of the market share in the fast-food retail space.
A week back, McDonald's released an online campaign with a video that allows customers to post questions such as “Is the fast-food chain’s beef real?” or are “lips and eyeballs” included in the trimmings. The video shows the inside of a meat supplier plant asserting that there is “no pink slime” or “worm meat” in its beef. The management is hopeful that with such ad campaigns the company will be able to restore the customer trust which has been shaken by the supplier episode and will be able to pull up the sales at the counter.
Share market reacts, but dividend payout for investors likely
Stock of the fast-food chain was down 0.6% at $91 in afternoon trading after it reported a 30% decline in third-quarter profits. However, to lift the mood of its investors, McDonald’s board of directors increased the quarterly dividend by 5% to $0.85 per share effective for the fourth quarter of the fiscal year.
McDonald's has tried to keep investors calm by returning $4.6 billion, year to date, to shareholders until September 30, through dividends and share repurchases. This is in connection with the $18 billion to $20 billion three-year cash return target set by the company for rewarding its stock holders.
Final note
McDonald's needs to get back to the basics of its menu cart to create an uptick in its comparable sales which will directly pull up its profits in the long run. The present challenge for McDonald's is to be able to retain its popularity in the fast-food retail space, as its third-quarter results portray a retailer that is presently in a losing position when compared to the smaller rivals who are growing bigger. Let’s hope that McDonald's is able to win back its position and fame within the coming few quarters, or else it might be such that everything is lost and there could be very less to appreciate in McDonald’s financial books.
