Must-know: McDonalds’ quarterly earnings summary

Amit Jhaveri

Must-know: McDonalds' 2Q14 earnings (Part 5 of 5)

(Continued from Part 4)

Summary of McDonalds’ quarterly earnings

Despite the slowdown in sales, McDonald’s is able to generate excess cash. The company has a diversified market with such a large global operation. The management is committed to return $18–$20 billion cash to investors between 2014–2015. These are a good characteristic of a defensive stock. However, McDonald’s needs to reverse its comparable sales and guest count metrics to maintain its market position. Needless to say, it has competitors such as Yum! Brands (YUM), Burger King (or BKW) and Wendy’s (WEN) ready to eat away at the market share. As of July 24, 2014, the stock was trading at a price earnings ration (or PE) of 17.32x, with an earnings per share (or EPS) of $5.51 according to NASDAQ.


Strategic initiatives for the future

McDonalds’ (MCD) management plans to tackle growth issues with various strategies, including providing relevant food choices to the customers, easing up ordering at restaurants, the ability to customize and personalize the menu, increasing accuracy and speed of service, engaging customers digitally, transparency of food quality, service resets in the U.S., and “servicing kitchen enhancement” in Europe. However, McDonald’s had introduced a healthy menu to be more relevant to the customers, but hasn’t  been  successful. Some of the strategies stated above are already executed in some of the markets, but the results haven’t been improving , especially the comparable sales.

According to the management, alignment of strategic initiatives with the franchise will take time—12–18 months. This will delay changes that are noticeable to customers. As a result, the management has kept the outlook on comparable sales for the rest of the year similar to the year-to-date (or YTD) comparable sales. The company plans to open 1,500–1,600 new stores. It’s  re-imaging  another 1,000 existing locations, which might mitigate this downside. But with 461 new restaurants and 310 restaurants re-imaged , and weak sales up until the first half of 2014, the question to ask is whether it’s the physical appearance of the store or it’s the food that is unable to attract customers. Tension in Ukraine and Russia may continue to put a downward pressure on currencies and eventually on sales in those regions. Due to these factors combined, McDonalds’ shares may face a downward pressure.

Finally, some analysts questioned the effectiveness of the strategies discussed by McDonalds’ management, such as the digital strategy, and opening a learning lab to identify customer’s preferences. Analysts will wait and watch to see if these strategies are able to bring customers back to the restaurants.

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).

Click on this link to go to the Market Realist Restaurant sector page to read more about the restaurant industry and companies.

Browse this series on Market Realist: