McDonald's (MCD, Financial) reported its 1Q15 results yesterday, and the results were depressing in terms of revenue, EPS and comparable store growth. All these key metrics witnessed a decline for 1Q15. While the results were negative, McDonald's has continued to trend higher and the positive momentum in the stock is due to a potential turnaround plan to be announced by the company. This article discusses the results and the reasons to wait until the turnaround plan is announced.
For 1Q15, the company’s consolidated revenue declined by 11% to $5.95 billion with the operating income declining by 28% to $1.38 billion. As a result of the sharp decline in operating income, the EPS declined by 31% to $0.84 per share in 1Q15 as compared to $1.21 per share in 1Q14. Overall, the results didn’t have any positives to talk about with global comparable sales declining by 2.3%.
The important point to mention here is that comparable sales declined by 2.6% in the U.S., 0.6% in Europe and 8.3% in APMEA. Therefore, the decline was not region specific and this underscores the point that McDonald's needs to revamp its menu and offering globally if it has to sustain amid strong global competition.
In terms of changes, McDonald's took a good decision in 1Q15 to close down the underperforming restaurants globally. In my view, this was a much needed decision to lower the operating cost pressure coming from underperforming restaurants. However, this is certainly not a turnaround strategy, and the company is planning to share initial details of the turnaround strategy by May 4, 2015.
The markets are expecting something positive to come out of the turnaround strategy and this is evident from the fact that McDonald's has moved higher to $97.8 after bottoming out at $88.8 on Jan. 20, 2015. The uptrend in the stock comes at a time when the company has been reporting weak comparable sales on a continual basis. It is clear that the stock is positively discounting the turnaround strategy, but I would wait for more details on the turnaround before recommending any exposure to the stock.
In my view, change in customer experience and some key changes in the menu is very likely. But it remains to be seen how this impacts global sales considering the fact that the market is getting more competitive globally.
From a shareholder returns perspective, McDonald's continued to perform well with returns of $1.4 billion through dividends and share repurchase in 1Q15. I expect this to continue through 2015, but my main focus is on the turnaround strategy rather than dividends or buybacks at this point of time. When Chipotle Mexican Grill (CMG, Financial) reported 1Q15 results, the revenue, comparable restaurant sales and EPS growth were robust. While McDonald's is much bigger in size and scale, smaller companies are taking away the market share through an attractive menu offering.
In conclusion, I would not be tempted to participate in the current rally for McDonald's that is largely driven by the expectation that a turnaround strategy would work for the company. I would rather wait for the implementation of the strategy and its impact on performance before considering exposure to McDonald's.
