McDonald’s Corporation (MCD) posted fourth quarter and full year 2014 results. Earnings for the fourth quarter beat the Zacks Consensus Estimate, while revenues missed the same. None of the regions posted positive comps in the fourth quarter. The company expects first half of 2015 performance to be impacted by macro issues.
Adjusted earnings of $1.22 per share beat the Zacks Consensus Estimate of $1.20 by 1.7%. However, it declined 13% year over year owing to a decline in revenues and increase in interest expenses.
Adjusted earnings exclude the impact of the supplier issue in China. Including the impact of these items, earnings were $1.13 that declined 19% year over year.
Revenues of $6.57 billion declined 7% year over year and missed the Zacks Consensus Estimate of $6.72 billion by 2.3%. The significant downside reflects sluggish performances in all its regions. The Asia/Pacific, Middle East and Africa (APMEA) region declined the most due to supplier issues in China.
Behind the Headlines Numbers
In the quarter, revenues from company-operated restaurants declined 9% to $4.30 billion. Revenues from franchise-operated restaurants declined 3% to $2.28 billion.
Global comps declined 0.9% year over year due to negative guest traffic in all major segments. However, the decline compared favorably with a decline of 3% in the prior quarter. In fact, comps improved in all its regions on a quarterly basis, which reflects the company’s efforts to enhance its marketing and simplify the menu options in order to strengthen its position in the current competitive environment.
Comps in the United States decreased 1.7% year over year, owing to negative guest traffic amid ongoing broad-based challenges such as soft consumer spending environment and stiff competition. However, it was better than the prior quarter decline of 3.3%.
Operating income in the U.S. declined 15% year over year due to higher selling, general and administrative expenses and costs related to initiatives taken to address the current market situation, which did not reap full benefits.
Comps in Europe fell 1.1% year over year. The dismal comps reflect poor performance in Russia where the company is facing pressure from consumer safety regulators leading to temporary closure of restaurants. Also, weak performance in France and Germany added to the woes. However, these negatives were partially offset by better performance in UK. Comps were favorable compared to the prior quarter decline of 1.4%. Operating income declined 14% year over year.
McDonald’s posted comps decline of 4.8% in the Asia/Pacific, Middle East and Africa (APMEA) region in the fourth quarter, marking the second consecutive quarterly decline. The results reflect the impact of recent food safety issues in China, which adversely affected comps in China, Japan and certain other markets.
In Jul 2014, it was found that Shanghai Husi Food Co – a supplier of McDonald’s — was reusing meat that had fallen on the factory floor as well as mixing fresh and expired meat. This led to food safety concerns among McDonald’s customers. Since then the issue has been negatively impacting comps. However, the decline was lower than the prior quarter decline of 9.9% possibly as solid performance in Australia offset the negatives to some extent.
Operating income for the region declined 44% year over year.
Total operating costs and expenses declined 1.5% year over year to $4.82 billion. Operating income fell 20.4% owing to the impact of the supplier issue in the APMEA region and soft performance in other markets.
Full Year 2014 Results
For full year 2014, McDonald’s reported earnings per share of $5.36, down 3.4% year over year. However, it beat the Zacks Consensus Estimate of $5.17 by 3.7%. Revenues of $27.4 billion were down 2% year over year and also missed the consensus mark of $27.6 billion by 0.5%. Comps for the full year declined 1% year over year reflecting negative guest traffic in all major segments.
Tepid View for First Half 2015
The company expects comparable sales for January to remain negative. In fact, it expects results to remain under pressure in the first half of the year.
Our Take
One cannot deny the fact that this giant hamburger chain is consistently trying to regain consumer confidence and revive sales in all its served markets through menu innovation and promotions. McDonald's is trying to boost revenues by introducing variations of items already on its menu instead of making new offerings.
The company has come up with a “Create Your Taste” program that would allow customers to create burgers of their own choice for the first time. However, these initiatives have yet to yield results and convert into positive numbers.
Meanwhile, other issues like vinyl reportedly being found in McNugget could dampen the company’s efforts to gain consumer confidence to some extent.
McDonald’s currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include Kona Grill Inc. (KONA), Papa Murphy's Holdings, Inc. (FRSH) and Red Robin Gourmet Burgers Inc. (RRGB). All these stocks sport a Zacks Rank #1 (Strong Buy).
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