Last year was one to forget for McDonald's Corp. (NYSE:MCD). It seemed that everything that could go wrong did go wrong for the fast-food giant. But while McDonald's problems seem insurmountable, there are signs of progress.
Comparable-restaurant sales, which measure sales at locations open at least one year, are finally improving in key markets including the United States and Europe. A new chief executive officer could also bring the fresh perspective needed to continue this turnaround.
However, I'm not quite ready to buy more McDonald's stock. One key market -- the Asia-Pacific, Middle East, and Africa region, or APMEA -- is still posting horrible results due to public relations nightmares in China and Japan. If McDonald's fixes its problems in these two critical nations, I'd consider adding to my position. Until then, I'll stay on the sidelines.
Emerging markets must stabilize
In order to feel confident enough to buy more McDonald's stock, the first thing I need to see is the cessation of the perpetual cascade of bad news. During the past year, it seemed a new negative headline about McDonald's surfaced on a regular basis, most originating from the company's foreign operations. Specifically, the performance of McDonald's in the Asia-Pacific region has been an unmitigated disaster.
First, a key supplier in China was found to be repackaging expired meat with new expiration dates last year. A worker was also caught reusing food that had fallen on the floor. More recently, Reuters reported that McDonald's Japan issued an apology after customers found a tooth and plastic in their food.
McDonald's ultimately suspended its meat supplier for improperly handling food in China. McDonald's had to ship to these restaurants through alternate product sources. This caused the company to lose significant sales. Even worse, its public image suffered greatly.
McDonald's owns 49% of McDonald's Japan, which is adding to the company's misery right now. McDonald's Japan is expected to rack up its sixth-consecutive year of sales declines. Moreover, McDonald's Japan is likely to have lost money in 2014, the first annual loss in the past 11 years.
Collectively, these issues have resulted in a dramatic decline in the APMEA region. Comparable sales there fell 4% in the fourth quarter, then 12% in January.
By comparison, the company's performance was relatively good in its other core regions. McDonald's posted same-restaurant sales growth of less than 1% in both the United States and Europe in January. It seems the initiatives taken by McDonald's to simplify its menu and enhance its image are working in its most developed markets. APMEA is the sole reason why McDonald's continues to suffer declining comps.
These poor results in the emerging markets are a big problem for McDonald's. The APMEA segment comprised 23% of the company's total revenue in the first nine months of last year. China and Japan are major APMEA components -- joining Australia to provide more than 50% of sales in the region last year.
Equally troubling is that the APMEA region used to be McDonald's primary growth opportunity. Comparable sales there rose more than 4% in 2011, but growth has fallen off each year since. Management acknowledges its missteps in the emerging markets by saying it is committed to brand recovery and restoring customers' trust in the region. But clearly much work remains.
Looking for emerging-market improvements
Until McDonald's gets its act together in China and Japan, the risk-reward proposition isn't quite attractive enough. Management has vowed to fix the problems, but unfortunately, it isn't there yet.
McDonald's is still held in high regard among income investors, and for good reason: It's one of the premier dividend stocks out there. It has raised its dividend each and every year since its first payout in 1976, a streak amounting to 38 years. At its recent stock price, McDonald's offers a 3.6% dividend yield, which is attractive, but the turnaround in the emerging markets needs to materialize before I'd buy more McDonald's stock.