By Julie Jargon
McDonald's Corp. reported first-quarter results that new Chief
Executive Steve Easterbrook labeled "disappointing," as U.S sales
fell more than expected despite new promotions and other turnaround
initiatives in its critical home market.
Sales at U.S. stores open at least 13 months fell 2% in the
three months through June, compared with the 1.5% drop analysts
polled by Consensus Metrix had expected. Global same-store sales
slipped 0.7%, worse than the 0.4% decline Consensus Metrix had
forecast.
McDonald's net profit sank 13% in the quarter.
Mr. Easterbrook, who became CEO on March 1, has made a number of
changes to try to revive a business that has been losing customers
to fast casual outlets and rival fast food chains, including
eliminating antibiotics from chicken, introducing better burgers,
adding customizable options and emphasizing the freshness of its
ingredients. McDonald's also has recently debuted new lemonades,
Sirloin burgers and Artisan grilled chicken sandwiches.
But McDonald's said recent products and promotions, such as the
sirloin burgers, didn't achieve the expected consumer response.
McDonald's shares slid 0.5% in early afternoon trading, leaving
them down about 2% since Mr. Easterbrook took over.
"We believe trends are improving and change is happening faster
at McDonald's than it has in the past," RBC Capital Markets analyst
David Palmer said in a research note. "That said, this change is
driving a gradual improvement rather than a 'big bang' to
sales."
Mr. Easterbrook acknowledged that the quarterly results were
"disappointing," but said "we are seeing early signs of momentum."
He said he expects McDonald's to post positive global same-store
sales in the third quarter.
He said McDonald's will continue to work on simplifying its menu
and testing all-day breakfast service. McDonald's has been testing
all-day breakfast in some markets, the results of which have been
encouraging, according to a memo reviewed by The Wall Street
Journal, which said franchisees are preparing to roll it out
nationwide as soon as October, pending a vote.
Mr. Easterbrook didn't specify a timeframe for a broad rollout
of all-day breakfast, but said restaurants will have to simplify
their kitchen procedures in order to accommodate it. "If we believe
all-day breakfast is a sufficient sales driver, the net net has to
be simplification and only on that basis we would be moving
forward," he said.
Chief Financial Officer Kevin Ozan said that a wage increase
McDonald's approved for workers at its U.S. company-owned
restaurants will pressure profit margins in the second half of the
year. On July 1, McDonald's began paying workers at its roughly
1,500 company-owned restaurants in the U.S. at least $1 an hour
more than the local minimum wage. To help offset higher labor
costs, Mr. Ozan said, the company raised menu prices at the end of
May, leaving its U.S. prices overall for the second quarter 2%
higher than a year earlier.
McDonald's also has been struggling in Asia, where food-safety
concerns have scared off many customers. In its division that
includes Asia, same-store sales in the quarter fell 4.5%. Europe
was the one bright spot, where same-store sales increased 1.2%.
McDonald's reported a profit of $1.2 billion, or $1.26 a share,
down from $1.39 billion, or $1.40 a share, a year earlier. Revenue
slid 9.5% to $6.5 billion. Analysts polled By Thomson Reuters had
forecast $1.23 a share in earnings and $6.45 billion in
revenue.
McDonald's has announced some structural moves to improve
results, such as selling thousands of restaurants to franchisees
and cutting $300 million in costs. Analysts have asked McDonald's
if it plans to do something more dramatic, such as spinning off
some of its real estate.
During the call, Mr. Ozan said the company is evaluating several
financial initiatives to boost shareholder value and that he will
update investors at a conference in November. When asked if the
company's real estate will be part of the analysis, Mr. Ozan said,
"We're looking at everything."
Chelsey Dulaney contributed to this article.
Write to Julie Jargon at julie.jargon@wsj.com
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