On May 4, 2015, McDonald's (MCD, Financial) announced the first few steps of the turnaround plan and on May 8, 2015, the company announced the global comparable sales for April 2015. With these two announcements in focus, this article discusses the reasons to believe that McDonald's sales will remain sluggish in the foreseeable future. In line with this view, I believe that McDonald's is likely to remain range bound or lower in the coming quarters.
Coming first to the global comparable sales for April 2015, McDonald's reported a decline of 0.6% in comparable sales. Comparable sales declined by 2.3% in U.S. and 3.8% in APEMA while sales increased by 1.0% in Europe. Overall, the negative trend in comparable sales continued and I believe that this is likely to continue even in May 2015. It is important to note that APMEA sales decline was sharp and the region is potentially a high growth market. However, the company’s menu offering is not attracting sales in the region.
I mentioned earlier that I expect global comparable sales to remain sluggish in May 2015. The reason for this view comes from the first turnaround plan announced by the company, which is largely an organizational structure change plan than a plan to boost sales through any change in menu offering. While the organizational structuring plan is a part of the overall plan to boost sales, the overall change strategy is likely to come in parts and the change will take time.
In the coming part of the plan, I would like to see further information and initiatives on the menu. The company’s menu needs a revamp and that can potentially be the single biggest game changer for McDonald's. While the company has mentioned in its April 2015 comparable sales release that it plans to offer a menu that resonates with the local market, it remains to be seen what changes are implemented and the impact of these changes on the company’s sales. Until there is sustained reversal in sales, there are reasons to be cautious on McDonald's with rapidly changing consumer preference towards a healthier menu.
Another point in the turnaround plan is the company’s target to increase shareholder returns. While this might seem positive, I am of the view that increasing shareholder returns in good times would make more sense than at this point of time. This is especially true considering the point that the company’s shareholder return plan of $8 to $9 billion for 2015 is likely to be partially debt funded. Therefore, leverage metrics are likely to worsen in the coming quarters.
McDonald's also intends to deliver $300 million in net G&A savings, most of which is likely to be realized by the end of 2017. I would like to see more cost-cutting initiatives through swifter closure of unprofitable outlets and through refranchising. While the company is undertaking a swift refranchising initiative, the impact on margins remains to be seen.
In conclusion, the company has announced just the first part of the turnaround plan and I believe that there will be more plans implemented in the coming quarters. In particular, I would like to see the plans related to simplifying and modifying and menu coupled with enhancing customer experience. Until these plans are implemented and the impact is seen on the results, I believe that the stock is likely to trend sideways.
