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McDonald's Business Is Under Historic Strain

By Demitri Kalogeropoulos - May 1, 2020 at 8:50AM

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Sales dropped over 22% globally at the start of the pandemic.

Investors had been bracing for some rough operating metrics in McDonald's (MCD 0.32%) first-quarter report, which included the start of stay-at-home orders across its biggest markets. The fast-food giant has been accumulating cash in response to the slump and in early April withdrew its 2020 financial targets.

This week, McDonald's revealed the scale of the challenge COVID-19 represents to its business. The novel coronavirus has sent customer traffic diving and forced sustained closures in about 25% of its global store base. Let's take a closer look.

A man carrying to-go fast food.

Image source: Getty Images.

Sales trends

Demand was booming in the weeks before COVID-19 reached global pandemic status. Comparable-store sales were up 8% in the U.S and 7% globally for the two-month span that ended in February. That spike marked an acceleration from the 6% increase McDonald's reported for late 2019 and likely involved robust customer traffic and market share wins. "Following our strong performance in 2019," CEO Chris Kempzcinski said in a press release, "McDonald's began 2020 with exceptional global momentum."

The growth picture has been different since mid-March, when social-distancing efforts spread around the world. Sales fell 13% in March and dove 35% in the international segment. These trends pushed overall comps down 3.4% for the full quarter, which included less than a month of impact from COVID-19.

Store and cash updates

McDonald's said essentially all its U.S. locations have stayed open while focusing on drive-thru, delivery, and take-away functions. More than half of its international stores remain closed, though, as many countries operate under strict stay-at-home orders. Overall, 75% of the global store base is open as of late April.

The company has made a few moves aimed at shoring up its finances in case the sales slump stretches on. The shifts are needed in part because of the widespread deferral of cash collection from its franchisees, who are under significant strain right now.

McDonald's has paused its stock buyback program, reduced planned capital spending by $1 billion, and taken on $6.5 billion of new debt. Operating income for the first quarter fell 17% after accounting for currency exchange rate moves, and profitability dropped to 36% of sales from 42%.

Looking ahead

The fiscal second quarter will likely look significantly worse, with comparable restaurant sales down 13% in the U.S. in March and lower by 22% overall. Executives said the weak traffic trends that started in mid-March have continued into April and are expected to impact the business as long as COVID-19 containment measures are being observed.

That means investors can expect at least one more quarter of unusually weak sales, profit, and cash flow trends, with comps potentially diving by 25% or more. Whether McDonald's then starts moving back toward the record growth it was seeing in early 2020 will depend on global economic conditions, along with shifting consumer spending attitudes.

For context, China, the first market to see a dramatic impact from the pandemic, is back to full operating capacity. But management says sales are still sluggish there, "as consumers have not fully returned to their pre-COVID routines." The big question is how quickly that adjustment happens for fast-food fans in China and around the world.

Demitrios Kalogeropoulos owns shares of McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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