MCD is on the Hedgeye Restaurants Best Ideas list as a LONG.
McDonald’s (MCD) reported 2Q15 earnings result yesterday, performing more or less in-line with our expectations. Global same-restaurant sales (SRS) decreased 60 basis points YoY to -0.7%, versus consensus of -0.4%, reflecting negative guest traffic in all major segments. Although negative, it is a marked sequential improvement versus the -2.3% seen in 1Q15. We will break down the numbers by segment later in the note. Company-operated restaurant revenue of $4.26B outperformed consensus estimates of $4.16B, yet still down roughly 11% YoY. Franchise operated revenue came in right on target matching consensus at $2.24B down roughly 6.5% YoY. 2Q15 EPS was $1.26 beating consensus of $1.23 by $0.03, but declining 10% YoY.
Management highlighted that 80% of the decline in operating profits came from two countries, U.S. and Japan. Highlighting that MCD is strong company with just a few regions of the world causing the company’s growth related issues.
U.S. 2Q15 SRS decreased -2.0% versus consensus expectation of -1.5%, sequentially seeing a minor 60 basis point improvement. These results reflect negative guest traffic, as new products and LTO’s did not achieve the lift expected. All-day breakfast tests have been going well, and we are optimistic on the effect its rollout would have on the performance.
Europe 2Q15 SRS sales increased +1.2%, just shy of consensus estimates of 1.5%, a notable improvement sequentially, coming off four consecutive quarters of negative comps. Results are being affected by continued economic challenges in key markets, and charges as part of the global business turnaround plan.
APMEA 2Q15 SRS decreased -4.5% versus consensus of -3.4%, again showing improved trends sequentially, as the effects of the supplier issue continue to dissipate in Asia.
After listening to the call there are obviously still issues to figure out, especially domestically in the U.S., as turnaround efforts have not performed well to date. But we are very encouraged by positive performance across the International Lead Markets segment, in which management stated quarter to date performance is positive and showing strength.
Notable comments during the call:
- Financial results remain disappointing but they are seeing early signs of momentum, expecting to see positive growth globally in Q3, led by International Lead Markets and High Growth Markets.
- International Lead Markets segment is moving in the right direction, Australia, Canada and UK are seeing strong performance, France is gaining share and Germany is turning the corner.
- UK, 37 consecutive quarters of positive comps.
- Canada focusing on convenience, rollout of dual lane drive-thrus, strong breakfast growth, free coffee promotion earlier this year and new salads on the core menu.
- Germany, 1st quarter since 2Q12 of positive comps.
- Developmental license agreement for 100 new sites along the Autobahn in Germany.
- China as a whole had a -3% comp in 2Q15, the top five cities which represent 50% of sales are flat quarter to date. While lower tier cities are being effected by macro-economic factors and not recovering as quickly.
- U.S. remains disappointing, low price structure implemented this year was an important first step. Northwest region was top performing, having positive results in the first month of Q3.
- Launching mobile app in Q3, designed to streamline customer service experience. Initially will have limited capabilities, but will be updated over time to include mobile ordering.
- Expanding all day breakfast into a limited number of new markets to learn more.
We at Hedgeye believe Q3 will be the inflection point to this turnaround, as a lot of the little things management has implemented will have ample time in the market to take full effect.