While the world watches on, McDonald's (MCD, Financial) seems to be pulling all the stops in an effort to get in on higher profits. As the company makes necessary changes to carry out its mandate of attracting more sales, the question is, will they succeed and raise their profits. From July 01, 2015, McDonald will operate under a new organization structure with the given below market segments.
The first segment would be the US market, which is McDonald’s largest segment accounting for more than 40% of the company’s operating income.
The second segment comprises of International Lead Markets, which are established markets like Australia, Canada, France, Germany and the UK, that operate within similar economic and competitive dynamics and offer similar growth opportunities and in addition collective comprises of 40% of the company’s operating income.
The third segment represents High Growth Markets, which possesses relatively higher restaurant expansion and franchising potential including China, Italy, Poland, Russia, South Korea, Spain, Switzerland and Netherland and collectively they represent 10% of the company’s operating income.
The last segment is the Foundational Markets, which represent the remaining markets in the McDonald system each of which has a potential to operate under a large franchise model.
Moreover, enhancements to McDonald operating approach will be supported by plans to further optimize the company’s restaurant ownership mix, deliver G&A savings and accelerate cash returned to shareholders.
McDonald is expecting to re-franchise 3,500 restaurants by the end of 2018, increasing the pace of re-franchising and accelerating the global franchised percentage from the current 81% to somewhere around 90%. This marks a way forward from the company’s previous plan to refranchise 1,500 restaurants by 2016.
Furthermore, the company delivers approximately $300 million in net annual G&A savings most of which would be realized by the end of 2017 in connection with the company’s organizational structure, re-franchising strategy and more stringent discipline for spending throughout the organization.
McDonald’s desire is to return $8 to $9 billion to shareholders in 2015 and to reach the top end of its 3 years $18 to $20 billion cash return to shareholders. In first quarter 2015, the company reported global comparable sales decrease of 2.3% because of negative guest traffic in all major segments. Also, consolidated revenue decrease of 11%, which is 1% in constant currencies.
Besides this, in first quarter 2015 diluted earnings per share of $0.84, a decrease of 31%, this includes strategic charges reaching $0.17 per share and a not positive foreign currency translation impact of $0.09 per share. Moreover, in constant currencies and excluding the strategic charge, earnings per share slumped by $0.11 or 9%. During the same period of its first quarter 2015, the company gave returns of $1.4 billion to shareholders in shape of dividends and share repurchases.
In the segment breakup, US first quarter 2015 comparable sales decreased 2.6%, thus, representing negative sales and guest traffic while the segment product and promotional offers did not overcome the competitive activity. In addition, US operating income for the first quarter 2015 declined 11% and this in reality representing a weak sales results and the impact of restructuring and restaurant closing charges. In the first quarter 2015, the US continued to simplify its menu and focused on local menu initiatives, which would be more responsive to consumer preferences.
Europe first quarter 2015 comparable sales decreased to 0.6%, whereas positive performance from the UK was more than offset by weak performances from France and Russia. The first quarter of 2015 operating income, decreased 20% due to reflecting soft consumer sentiment and currency and inflation pressure from Russia. In addition, unsolved macro-economic problems in Europe failed the company in first quarter 2015.
The conclusion is that the management took a meaningful step in closing down non-performing restaurants in first quarter 2015. This is because those restaurants are not contributing to the bottom-line profitability of McDonald’s vision. The management is keen to regain its business and improve sales at its 36,000 restaurants around the world.
