McDonald’s FY2015 Earnings Preview: Story Of A Perfect Comeback

McDonald’s (NYSE: MCD) turnaround story of 2015 has been one of the most talked about topic last year. The company is all set to end fiscal 2015 on a high positive note when McDonald’s reports its fiscal 2015 annual report on January 25. ^[1] MCD stock rose more than 25% over the last 12 months, touching its all-time high of $120.

The market analysts are expecting the company to post EPS of $1.23 for Q4 2015 on net revenues of $6.23 billion. Additionally, fiscal 2015 EPS are estimated at $4.87 on net revenues of $25.3 billion. ^[2] The turnaround plan and recovery efforts in Asian markets were the key factors in reviving the company’s performance in the second half of the year. Moreover, the introduction of McDonald’s Next and the all-day breakfast menu will probably be the primary highlights in this annual report.

Trefis has a $107 price estimate for McDonald’s, which is roughly 8% below the current market price.

See Our Complete Analysis For McDonald’s Corporation

One of the questions that troubled investors during the initial months of 2015, was whether the Golden Arches could pull themselves out from their troubles, and maintain their dominance in the fast-food industry. The introduction of a turnaround plan by the new CEO, Steve Easterbrook, instilled positive sentiments among the investors, and the stock managed to stay above the $90 level, despite all the headwinds carried over from the previous year.

Turnaround Plan: Concentrated Efforts

In Q1 2015, McDonald’s reported a 2.3% decline in comparable store sales growth, primarily due to a major drop in the customer count in all reporting segments. The net revenues for the first quarter declined 11% year-over-year (y-o-y) to $5.9 billion, whereas the net income dropped 33% y-o-y. ^[3] Soon after this, Steve Easterbrook announced a new turnaround plan, which presented the company’s new financial updates and franchising targets, as well as mentioned the new reporting structures. ^[4]

The new plans started reaping benefits for the company, as McDonald’s managed to outperform market expectations in the second quarter. ^[5] Moreover, positive guidance for the rest of the year managed to sustain the investors’ confidence, and the stock climbed up to the high $90s. The company did not have to wait much longer, as the tables turned in Q3 2015 with a 4% increase in global comparable store sales, and the stock responded with an impactful bullish move.  ((McDonald’s, Q3 2015, earnings call transcript)) (See: McDonald’s Stock Up 8% on Positive Comps Across All Major Markets)

The new reporting structures in the turnaround plan have allowed the company to focus on the affected segments in a more efficient manner. Moreover, the recovery efforts in China and Japan have seemed to pick up the pace in the latter months of 2015. However, there is no doubt that McDonald’s Japan is expected to report record losses for fiscal 2015. (See: Is Japan Situation A Warning Sign For McDonald’s?)

Japan Unit To Bring Down Overall Results

In the first half of 2015, McDonald’s Japan reported 85.28 billion Yen in sales, down nearly 30% over the same period last year. The recovery efforts in Japan were unable to revive the guest count, which was down 18.8% year-over-year (y-o-y) for the first half of 2015, whereas the comparable store sales for the same period slumped 27.7% y-o-y. ^[6] For fiscal 2015, McDonald’s expects its Japan unit to post a net loss of 38 billion Yen, with an operating loss of 25 billion Yen, which in any scenario is still a huge setback for the company. Considering the fact that McDonald’s expects this performance after claiming the success of its recovery efforts, one can estimate the gravity of the company’s present perception among Japanese food lovers, and the future effort the company still needs to put in.

However, it might not affect the stock price significantly, since most of the impact from this scenario have been factored in by the investors. The movement in the stock might come from the guidance for the next year.

New Developments To Keep Investors & Customers Interested

McDonald’s all day breakfast has been a huge success in U.S. Last year, in October, the burger giant announced its plan to serve some of its breakfast menu items throughout the day. ^[7] Last month, a study reported that this initiative has been luring in more customers, effectively leading to better comparable store sales growth. ^[8] It might be one of the biggest reasons for improved comparable store sales growth in the fourth quarter.

According to a report by NPD group, in the first two months of the initiative, one-third of the breakfast buyers who purchased breakfast in non-traditional hours were new customers. Moreover, most of them were interested in purchasing the breakfast items during lunch hours. Among the customers who purchased breakfast items during lunch hours, more than 60% of the transactions also included non-breakfast items. ^[9] This indicates that not only does this initiative help improve the customer count, but is also boosting the sales of other food items, resulting in improved average spend per customer visit. (See: Is McDonald’s’ All Day Breakfast Strategy Working?)

Other concepts and initiatives, such as ‘Create Your Taste’ and ‘McDonald’s Next’ are getting immensely successful in their respective regions. In Hong Kong, McDonald’s opened a new modern concept store called McDonald’s Next, serving items including quinoa, asparagus, and crayfish. ^[10]

These new initiatives have not only been effective in offsetting the decline in sales during the initial months of 2015, but also paved the way for the future of this brand. In short, we can expect the company to give a positive guidance report in the earnings conference call, despite the overall decline in margins throughout the year 2015.

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1. McDonald’s Q4 2015 earnings conference call [↩]
2. McDonald’s, Yahoo finance, Analyst estimates [↩]
3. McDonald’s Q1 2015, earnings call transcript [↩]
4. McDonald’s announces initial steps in turnaround plan including worldwide business restructuring and financial updates [↩]
5. McDonald’s, Q2 2015 earnings call transcript [↩]
6. McDonald’s Japan unit posts loss in 1H, Retains view [↩]
7. Let There Be Breakfast: McDonald’s Serving All Day Breakfast Starting October 6, news.mcdonalds.com [↩]
8. McDonald’s All Day Breakfast Is Luring Customers, Study Finds, The Wall Street Journal, December 8, 2015 [↩]
9. Two months into it, McDonald’s All-day breakfast is increasing visits and luring in new customers, finds NPD, www.npd.com, December 9, 2015 [↩]
10. McDonald’s revolutionary restaurant in Hong Kong might reveal the future of the brand [↩]