McDonald's (MCD 0.88%) released first-quarter earnings results this morning and results for the quarter ended March 31 were not good for the fast-food giant.
For both sales and earnings, the company performed worse than the average analyst estimate as compiled by Reuters, with revenue falling 11% from the year-ago quarter, and decreasing guest traffic across all of its major segments. Despite shaky results, McDonald's stock was up roughly 2.5% as of 1:25 p.m.
The results
First-quarter sales fell from $6.7 billion in 2014 to $5.96 billion in the most recent report. Using a constant currencies metric, which attempts to correct for fluctuations in international currencies, McDonald's reported a 1% revenue decline from its first quarter in 2014.
Diluted earnings per share came in at $0.84, a roughly 31% decline in diluted earnings from $1.21 in the year prior. Unfavorable currency exchange led to a $0.09 decrease in quarterly earnings per share. Consolidated operating income came in at $1.385 billion, representing a 28% decline year over year.
Global same-store sales dropped 2.3%, with U.S. comps dropping 2.6%. Explaining the poor domestic results, McDonald's cited underperformance from its promotions and products against competition. U.S. operating income fell 11% year over year.
European same-store sales dropped 0.6%. The company cited solid results in the U.K., but weak performance in France and Russia that led to sales erosion in the segment. Operating income for the geographic segment dropped 20%, or 4% using the constant currency metric.
Quarterly performance in the company's Asia Pacific Middle East Africa segment was particularly worrying, with sales at comparable locations dipping 8% amid brand weakness in Japan and turbulence in China. Operating income fell a staggering 77%, or 80% using constant currencies adjustments.
Sales at company-owned stores fell roughly 13%, while revenues from franchisees declined roughly 7%. Operating expenses fell roughly 4% from the year prior, and CFO Kevin Ozan indicated that the company would look to close struggling stores in order to improve profitability.
Despite the poor business performance, McDonald's first quarter marked yet another in which the company returned significant value to shareholders. The company carried out a combined $1.4 billion in dividend payments and share repurchases.
What's next for McDonald's?
The company's business is under pressure as fast-casual chains continue to have momentum with consumers, and fast-food rivals like Burger King and Yum Brands' Taco Bell are focusing on winning a greater chunk of the breakfast segment that's crucial to Mickey D's. The company is also facing big tailwinds in key markets like China and Russia, with major scandals that have continued to disrupt operations.
Franchisees are anxious, and many are apparently dissatisfied with the recent direction of the company. Independent owners of Mcdonald's locations recently returned their lowest favorability rating on record for company relations in the latest Janney Capital Markets survey, and the company must find a way to balance potential changes with the needs of franchisee partners. The company's press release for the quarter featured a quote by CEO Steve Easterbrook that highlighted management's desire to enact significant change at a rapid pace.
As the world's leading restaurant company, we are evolving to be more responsive to today's customer. McDonald's management team is keenly focused on acting more quickly to better address today's consumer needs, expectations and the competitive marketplace. We are developing a turnaround plan to improve our performance and deliver enduring profitable growth. We look forward to sharing the initial details of this plan on May 4, 2015.
The company has already made some big shifts: raising minimum pay at company-owned stores, promising to stop using ingredients that contain certain antibiotics and hormones, and testing to expand its breakfast menu throughout the day. Not all of the changes are being welcomed by franchisees, however, with the company's Create Your Taste custom burger stations being among the most contentious and costly additions. The new burger kiosk and setup is estimated to cost franchisees more than $100,000.
McDonald's faces the difficult task of navigating changing consumer tastes while not alienating the franchise business partners that have helped the company build its global presence.
