One of the worse quarters in McDonald's recent history

A couple of days ago the fastfood giant released its report for the fourth quarter and also the full year. In this post I will present some key data from the report and my own reflections. 

Results For The Fourth Quarter Compared With The Same Quarter In 2013.

- Sales decreased by 7% to 6,6 billion dollars (7).

- Net profit was 1,06 billion for the period, an decrease of 21% (1,4).

- Earnings per share (EPS) decreased by 19% to 1,13 dollars (1.4).

Results For The Financial Year 2014.

- Sales decrease by 2% to 27,4 billion dollars (28).

- Net income was 4,7 billion for the period, an decrease of 15% (5,6).

- Earnings per share (EPS) decreased by 8% to 4,82 (5.55).

Factors That Influenced The Results Negatively.

• Tough competition primarily in the US continues to weigh heavy on McDonald's profitability. Sales decreased 1.7% and operating earnings with 15% in the final quarter due to lower guest influx and sales in existing restaurants.
• McDonald's is also losing market share in its largest established market, Europe, where sales fell by 1% and operating profit by 14%. Russia and Ukraine has had weak development in the European segment, were the company's restaurants closed down due to the conflict in Ukraine.
• McDonald was also sentenced to pay the equivalent of 0.31 dollars per share in additional taxes, which is a one time cost.
• The supplier scandal in China had a negative impact on profits equivalent to about 0.23 dollars per share.

What Was Positive Then?

• On 18 September McDonald rose its dividend by 5% for the 39th year in a row.
• The fast food giant also bought back the equivalent to 2% of its total share count during 2014.
• McDonald's continues to open and renovate restaurants around the world. The company will also focus on increasing the number of franchise restaurants primarily outside the United States.

My View Of The Report
This report is one of the worse from McDonalds in recent years. If we disregard non-recurring items the result does not look as bad, but regardless of one-off items, earnings growth is negative. Here is how sales and EPS has developed during the past five years:

The picture above is pretty clear since EPS and Revenues are at their lowest levels since in 2010. McDonald's CEO Don Thompson admits that the company continues to face headwinds and that market environment is challenging. He stressed that the company is going to continue to focus on improving the customer experience, and he remains convinced that McDonald's can boost growth and create value for shareholders over the long term.

In order to boost growth McDonalds must increase the comparable sales and guest influx in existing restaurants within the established markets of Europe and the US. The company has for this reason developed three strategies to increase their relevance with their customers:

• Modernization and improvement of McDonald experience (trademark, restaurants, menus and customer service).
• Shorteing and simplifying the ordering and payment process with new technology such as mobile, web, and payment solutions. McDonalds has for this reason joined Apple Pay.
• Use existing resources more effectively to realize the points above.

To date, the implemented measures have apparently not had the desired effect since McDonalds is losing customers to competitors in their two main markets. I think that the fast food chain needs to reinvent its self somehow, to be able to reach mine and later generations (1980 to 2000) to really get the growth ontrack.

McDonald's is, despite the recent growth problems, a stable and shareholder-friendly company, that has raised dividends for 39 years in a row. I believe that the fast food giant is worth buying up to a price of about 87 dollars. You can, as usual, find my Watch List in main menu.

What is your view on McDonalds latest report?