The global restaurant industry is anticipated to reach $2.1 trillion by 2015. QSR (Quick service restaurant) growth is outpacing restaurant industry growth in the US, with heading organizations put intensely in elevating their items to further fuel growth. Burgers speak to the biggest business fragment, took after by different items, for example, pizza, pasta, sandwiches and snacks. There has been an exponential growth in the franchise restaurant especially in the fast food segment that has great influence on the anticipated growth in the coming Years. McDonald’s Corp (MCD, Financial) is one of the global leaders in the QSR segment, that has be expanding its footprints globally with an increased penetration.
Quarter Overview
The company recorded revenue growth of 1.3% year over year, to record $7,181.7 million as compared to revenue of $7,083.8 million in the same quarter last year. The increase in the consolidated revenue was mainly due to expansion of McDonald’s chain of restaurant. Operating income was flat year over year, to $2,189.0 million as compared to $2,197.7 million in the same quarter last year. Net income was recorded to $1,387.1 as against $1,396.5 in the same quarter last year. Comparable stores sales for the company was down by 1.5% year over year. Weather conditions were the major factor for the company which resulted in reduced comparable stores sales. It was not just McDonald’s, but most of QSR were hit by reduced comparable store sales in US due to weather condition.
Despite the decrease in the operating income, diluted EPS increased by 1% year over year, to record $1.4 per share. The share repurchase program of the company leveraged the EPS, as it reduced the share outstanding with its shares buyback programs.
Global Performance
| Region | Comparable Sales | operating income | Remark |
| US | 1.5% (Down) | 1% (UP) | Weather Condition has impact on the performance |
| Europe | 1.0% (Down) | 4%(Down) | UK & France performed strongly, while Germany was not up to the mark. Enhanced menu has a positive impact in the region |
| Asia/Pacific (APMEA) | 1.1% (UP) | 2% (Down) | Strong results from china, Japan continued to perform low |
Overall the year over year performance was flat in-terms of revenue and operating income. Company continues to be focused with the expansion plans and few changes in the beverage menu which can have a positive impact in future.
Workers at Fast Food “Fight for $15”
In the current month, the fast food industry in U.S is badly hit with the workers going on strike. The strike is in protest for wage hike by the workers of fast food restaurants in U.S. The pressure from the labor union is imposed on the entire fast food restaurant segment in U.S, the union demands minimum pay of $15/Hr for all the workers in the fast food which records around 4 million workers working in various fast food joints.
There has been few arrest of the demonstrator, but the union is all keen on winning the fight for $15 protest which is also a peaceful protest. McDonald’s will be badly hit by the protest and the company could be forced to be on the negotiation table with the Union. The company has insisted, and continues to insist, that its franchisees, not the corporation, that are more responsible for wages.
Set Back In Russia
The company is facing serious legal issues related to state food safety regulator's allegations of sanitary violations. The company has already pulled down 12 McDonald’s outlets in Russia, failing to comply with regulatory conditions, although this is a temporary closure as stated by the company. The U.S fast food chain has around 440 restaurants on Russia, and inspection of over 100 restaurants are underway spread across various regions in Russia.
"We are studying the essence of claims laid to us to determine the actions necessary to open the restaurants for our customers as soon as possible," McDonald's said.
Payouts
During the second quarter, the company illustrated it financial strength by announcing the payout in form of dividends and share repurchase programs. The company returned $1.6 billion to shareholders through dividends and share repurchase. The company plans to return around $18 billion to $20 billion to its share holders in next three years. This is a gain of 10% to 20%, compared to last three years, in terms of cash returned to their share holders.
Conclusion
The company had a flat second quarter and facing some headwinds in the third quarter. An investor should always wait to know the outcome of the wages protest in U.S. The wage hike to $15/hr may burn the operating margin of the company. Another hurdle in the current quarter is the operation in Russia where the performance of the company is badly hit by the food and sanitary regulation. The company will certainly try to comply with the regulation, but the intermittent break in the operation again will offset the revenue of the company in the current quarter. As an investor, one should be wait to know the complete outcome of the wage protest and results of various inspections of outlets in Russia. I would suggest being on sidelines for the moment, if you were considering McDonald’s in your portfolio.
