Fast-food giant McDonald's (MCD, Financial) had a worse-than-expected first quarter and blamed the sinking U.S. sales for dragging its profits in the first quarter. It also announced on this Wednesday that it would be bringing out a turnaround plan in the coming two weeks to reverse the sales trend that has been seen in the U.S. Also, the warning bells have started to sound loudly in China and Japan where recent scandals have ruined the fast-food chain’s reputation to a considerable extent. The replacement of ex-CEO Donald Thompson in January this year came as a surprise to many investors. His successor and CEO Steve Easterbrook stated during the earnings conference on April 22, “McDonald's management team is keenly focused on acting more quickly to better address today's consumer needs, expectations and the competitive marketplace…”
In the light of declining sales which has been tormenting the company for the past two years, let’s quickly take a sneak peek into the latest quarter results of McDonald's and then discuss upon the bright spots in the entire dark storyline.
A quick quarter recap
For the fast food giant, days are no longer rosy as its profits are crumbling, its sales are in the shrinking mode and the guest traffic is fast declining in the past few quarters. In the fast food business, there are lot many competitors such as Chipotle (CMG, Financial) which consumers are opting for instead of McDonald's as it is supposed to have much healthier menu options than the latter. It is to be noted that Chipotle was a part of McDonald's which the latter had sold off almost a decade ago.
The results were highly depressing for the world’s largest burger chain with the first-quarter profits tumbling by nearly $400 million, marking the steepest decline in profits than that witnessed in the previous full fiscal year.
Total revenue sank 11% year over year to $5.96 billion, and net income fell 32.6% to $812 million translating to $0.84 per share. The net income dropped almost 31% year over year driven by a global sales drop of 2.3% during the quarter and the foreign currency rate translation hit by the strong U.S. dollar. The company declared on Wednesday that U.S. sales fell 2.6% year over year while sales in Asia Pacific and the Middle East dropped 8% during the quarter. This reflects the “negative guest traffic in all the segments” as per the company’s statement.
Both the top and bottom line failed to meet forecast of the analysts of Thomson Reuters that were hooked to $1.06 a share as earnings on revenue of $6 billion.
Restructuring plan of action partially disclosed
CEO Steve Easterbrook stated during the earnings call – “We are developing a turnaround plan to improve our performance and deliver enduring profitable growth. We look forward to sharing the initial details of this plan on May 4, 2015…”
Meanwhile, the ubiquitous burger-and-fries chain has shared the plan of shutting down around 350 of its non-performing stores which are located mainly in the U.S., Japan and China. With 36,000 outlets worldwide, McDonald's has been under pressure from falling customer traffic and revenues for the past two years. Now, the company under the reign of the new CEO is hoping to bring in a worthwhile transformation that would be helpful to shore up the company.
Last month, the company announced that it would increase wages for 90,000 employees in company-owned restaurants in the U.S., and also that plans to cut back on chicken raised on antibiotics for promoting healthier food for the health-conscious consumers having changing taste buds all the time.
The company has plans of opening 600-700 additional outlets in the U.S. and in international locations and this would aid in reaching out to a larger base of consumers where customers can dine-in or take away their orders.
Parting thoughts
Steve Easterbrook seems be on the mission of initiating cost saving initiatives by closing non-performing stores or by upgrading the menu chart or services available at the performing stores. Though the quarter results were bleak, all eyes are waiting for the disclosure of the final turnaround plan which is likely to be released the coming month for better understanding on the measures being taken to return to the success path in the later quarters of the year.
