McDonald’s Earnings Preview: No Respite For The Burger Giant

McDonald’s (NYSE:MCD), the leader of the fast-food industry, is slated to announce its first quarter earnings report for fiscal 2015 on April 22. ^[1] The Golden Arches witnessed one of the tough periods in fiscal 2014 with net revenues declining roughly 2% year-over-year (y-o-y). The company struggled in all its geographical segments, facing financial and operational headwinds in some of the major markets worldwide. Stiff industry-wide competition in the U.S., declining customer traffic in China and Japan, and sluggish economic conditions in Russia, led to poor financial results for the company.

For fiscal 2014, the company reported a 1% y-o-y decline in comparable sales due to a major decline in customer traffic. As a result, the company’s net revenues declined 2% y-o-y and operating income declined 9% y-o-y. ^[2] On January 28, the Board of Directors announced the retirement of Don Thompson as President and CEO of McDonald’s, to be succeeded by Steve Easterbrook, the then chief brand officer and senior executive vice-president, on March 1. ^[3] Soon after the announcement, the stock jumped 5.6%. Don Thompson’s decision came as a result of the company’s sluggish performance over the last two years, especially in 2014, when the fast food leader faced challenges in  all its geographical segments. (See: Market’s Positive Speculation Ahead Of McDonald’s New CEO’s Business Plans Drives Stock Price Close To $100)

We have a $97 price estimate for McDonald’s, which is in line with the current market price.

See Our Complete Analysis For McDonald’s Corporation

Expect A Decline In Comparable Store Sales

McDonald’s reported declines in comparable store sales growth for January and February. In January, the company’s global comparable store sales declined 1.8%, with a comparable store sales decline of 12.6% in Asian markets offsetting the slight growth in the U.S. and Europe. Growth in the domestic market was due to a positive performance in the breakfast daypart, slightly offset by tough competition from the fast-casual restaurants. On the other hand, poor economic conditions in Russia offset the growth in the U.K. and Germany. However, the major concern for the company still remains the Asian markets, where comparable store sales declined 12.6%, indicating the declining trust of customers in the brand’s food quality. Brand recovery efforts, including rebuilding customer trust and introducing innovative menu offers, remains the top priority of the company. ^[4] The sluggish growth continued as the company reported a 1.7% decline in global comparable sales in February 2015, with sales declines in the U.S. and Asian markets. ^[5]

To add insult to injury, new issues emerged in Japan, as there were reports that a piece of vinyl was found in the chicken nuggets at one of the outlets in Aomori, Japan. ^[6]  McDonald’s Japan might take much more time to return to a normalized level. As a result, we can expect a decline in comparable sales in the first quarter of fiscal 2015.

McDonald’s Japan Forecasts Sales Decline In 2015

On April 16, 2015, McDonald’s Japan released its consolidated earnings forecast for fiscal year 2015. The company’s Japan unit expects a 14.4% decline in system-wide sales (combined sales of company-operated and franchised restaurants), and expects a 10% decline in its consolidated sales. As a result, consolidated net income loss is forecast to be roughly 38 billion yen. ^[7] As mentioned before, recovery efforts in Japan might take more time than expected. The company’s recovery efforts include introducing new menu offerings, innovative value options, and local spices for corresponding regions to attract customers.

McDonald’s Japan unit has described its revitalization plan as a four way strategy, which includes:

1. Initiatives to bring back customers to restaurants by introducing new Happy Meals options, providing more customized choice and a wider variety, as well as introducing loyalty programs.
2. Remodeling of existing restaurants to provide cleaner and inviting environment to the customers, and closing underperforming restaurants that don’t have long-term growth potential.
3. Strengthening management and business structure in Japan to meet the demands of local customers.
4. Improving cost efficiency and remodeling the cost structure.

The Japan unit plans to renovate close to 230 restaurant locations by changing store interiors in fiscal 2015. On the other hand, new store openings will be reduced to 20, half of that in 2014. The company estimates a net 20 billion yen ($165 million) as cost of remodeling and new store openings. And for that purpose the company took out loans of 22 billion yen from lenders such as Mizuho Bank.

In short, we can expect the first quarter’s sales to follow the same sluggish trend, indicating a poor start of the year for the burger giant.

View Interactive Institutional Research (Powered by Trefis):

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap

More Trefis Research

1. McDonald’s Q1 2015, earnings release [↩]
2. McDonald’s Q4 2014 earnings call transcript [↩]
3. McDonald’s announces key management changes [↩]
4. McDonald’s reports global comparable sales for January [↩]
5. McDonald’s reports global comparable sales for February [↩]
6. McDonald’s Japan faces fresh problem with chicken nuggets [↩]
7. Earnings forecast for Fiscal year 2015 and business revitalization plan [↩]