More tough times ahead for McDonald's

by Monica Watrous
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McDonald's remains in a sticky situation.

OAK BROOK, ILL. — Using words like “challenging” and “difficult” to describe 2014, executives of McDonald’s Corp. remain wary of the year ahead. The fast-food company ended the fiscal year with a 1% decrease in global comparable sales, as traffic fell in all major markets.

And the challenges continue.

“Looking to January, comparable sales are expected to be negative due in part to the shift in Chinese New Year and consumer perception issues in Japan,” said Don Thompson, president and chief executive officer, during a Jan. 23 call with financial analysts.

Net income for the fiscal year ended Dec. 31, 2014, was $4,757.8 million, equal to $4.82 per share, down 15% from $5,585.9 million, or $5.55 per share, for the year before.

Revenues for the year dropped 2% to $27,441.3 million from revenues of $28,105.7 million in fiscal 2013.

Several factors are to blame for the disappointing results, and not all headwinds were anticipated. In addition to ongoing macroeconomic challenges in the United States, McDonald’s encountered a volatile operating environment in Russia and Ukraine and supplier issues in Asia-Pacific, Middle East and Africa markets during the year.

“In response to these shortfalls we took a number of important steps to lay the foundation for our turnaround,” Mr. Thompson said. “We are acting with a sense of urgency as these steps are critical to addressing current performance and to advancing our longer-term strategies.”

Bracing for continued problems, company executives announced plans to pare back on several investments, including new store openings.

Meanwhile, McDonald’s aims to create a more relevant experience by rolling out a customizable burger platform and digital ordering. Last year, the company launched transparency and sustainability initiatives to improve consumer perceptions of the brand. Menu rationalization, “disruptive” value and new product innovation are on the way in the months ahead.

“2015 will be a year of regaining momentum globally,” Mr. Thompson said. “We expect further growth amid the pockets of success we are already seeing.

“However, it will take time, especially in our larger markets, for customers to notice the comprehensive changes that are under way.”

Fourth-quarter income fell 21% to $1,097.5 million, equal to $1.13 per share, from $1,397 million, or $1.40 per share, in the prior-year period.

Revenues for the quarter declined 7% to $6,572.2 million from $7,093.2 million in the comparable period.

In the United States, fourth-quarter comparable sales fell 1.7% and operating income declined 15% on lower traffic in restaurants and expenses related to repositioning the business.

“Throughout 2014 our results reflect the impact of ongoing broad-based challenges, including operating in an increasingly competitive marketplace amid sluggish industry growth,” said Pete Bensen, senior executive vice-president and chief financial officer. “We expect to incur additional U.S. restructuring costs in the first quarter.”

Europe’s fourth-quarter comparable sales dropped 1.1% and operating income declined 14%, reflecting weakening currencies on imported commodity costs and store closures in Russia and Ukraine and weakness in France and Germany, which was partly offset by positive performance in the United Kingdom.

“In Russia while all of our restaurants impacted by the temporary closures are back in operation, the market remains in a recession and the economic outlook is weak,” Mr. Bensen said. “More broadly, consumer confidence across most of Europe is forecasted to remain low throughout 2015.”

Comparable sales in the Asia-Pacific, Middle East and Africa region decreased 4.8% for the quarter, and operating income tumbled 44%, due to the lingering impact of last year’s supplier issue in China, Japan and certain other markets.

“While sales trends in China showed signs of improvement during the fourth quarter our best estimate is that it will take at least three to six more months for our business in China to return to a normalized level,” Mr. Bensen said. “For McDonald’s Japan, recovery from the supplier issue has not been as strong.

“At the same time new consumer perception issues have emerged which have further depressed sales and profitability.”
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