Must-know: McDonalds' 2Q14 earnings (Part 2 of 5)
Key metrics in McDonalds’ quarterly earnings
Key performance metrics that matter the most are comparable sales and costs, which eventually affects the margins. Comparable sales is used to identify whether McDonalds’ (MCD) same locations have resulted in a sales growth or a sales decline.
Flat global comparable sales for second quarter
McDonald’s reported flat global comparable sales and negative comparable guest count for 2Q14, which is concerning from a long-term income growth perspective. Also, the management expects negative global comparable sales in July.
Comparable sales in U.S declined by 1.5%, compared to an increase by 1% in 2Q13. McDonald’s faces tough competition from Yum Brands (or YUM), Burger King (BKW), and Wendy’s (WEN) in the U.S. However, the operating income increased by 1% for this segment. The management plans to revive the U.S. markets by improving customer experience through menu personalization, speed and accuracy of the service, re-imaging restaurants, and digitally engaging customers.
Comparable sales in Europe declined by 1% in 2Q14, compared to a decline by 0.1% in 2Q13. While the UK and France performed well, Germany’s market offset this performance. The company also stated that the introduction of blended ice beverages in the European market aided the second quarter’s performance. The operating income for this segment was flat—or a 4% decrease in constant currencies). To reverse the negative trend in the German market, the management is focused on improving food quality and its value perception.
Comparable sales for Asia/Pacific, Middle East, and Africa (or APMEA) increased by 1.1% compared to a decline by 0.3% in 2Q13. According to McDonald’s, China had strong comparable sales while Japan continued to show weakness. The operating income declined by 2%—or a 1% increase in constant currencies. According to McDonald’s, China’s market has been volatile. Last year this market was affected by Avian influenza. This year its image is tarnished by a meat scandal in which a local broadcaster, Dragon TV, aired workers processing expired meat. For the Australia market, McDonald’s plans to focus on the “loose change” menu and McCafe beverages drive sales. As for Japan, the company is facing competition-driving sales down and McDonald’s plans to reinvigorate this market by focusing on the family and happy meal menu.
What is constant currency?
Constant currency is a measure used by McDonalds’ management to exclude the foreign currency translation effects. According to company filings it’s calculated “by translating current year results at prior year average exchange rates.”
Investors who would like to gain exposure to the overall restaurant industry can invest in exchange-traded funds (or ETFs) like the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) and the PowerShares Dynamic Leisure and Entertainment ETF (PBJ).
Browse this series on Market Realist:
- Part 1 - Must-know: An overview of McDonalds’ quarterly earnings
- Part 3 - Must-know: Initiatives to improve McDonalds’ same store sales
- Part 4 - Must-know: The costs of McDonalds’ key metrics