By Annie Gasparro
McDonald's Corp. said its earnings will remain under pressure
for the next several months, as core changes to its business take
time to win back customers in its most important markets after a
year of stubbornly weak sales.
The world's largest restaurant chain by sales rounded out a
dismal 2014 with a 21% drop in fourth quarter earnings, it said on
Friday. McDonald's is battling changes in consumer tastes, economic
hurdles, and menu missteps that caused customer traffic to fall
3.6% globally last year, including a 4.1% drop in its most
important market, the U.S.
Chief Executive Don Thompson said 2014 was challenging, and he
expects that to continue through the first half of this year. But
efforts to pare back its menu, create more customizable options and
repair its image are revealing pockets of success, he said.
"We're changing, and we're doing it aggressively," Mr. Thompson
said on a conference call with investors. "However, it will take
time, especially in our larger markets, for customers to notice the
comprehensive changes that are under way."
McDonald's has said its broad, complicated menu slows service,
and it has lost touch with younger consumers who are trading their
Big Macs for seemingly healthier, fresher options like those at
Chipotle Mexican Grill Inc. It is also losing customers to more
upscale sandwich rivals such as Five Guys Holdings LLC and
Chick-fil-A Inc.
This month, McDonald's launched a new marketing campaign in the
U.S. with commercials and food packaging designed to refresh its
longtime "I'm lovin' it" slogan, under Chief Marketing Officer
Deborah Wahl, who joined in March, and McDonald's U.S.A. President
Mike Andres, who took over in October. Still, McDonald's expects
January same-store sales to decline.
"We are seeing more aggressive, disruptive value offerings in
the marketplace today," Mr. Andres said. He has shifted to a more
regional model so that local markets have the flexibility to be
more aggressive and price accordingly.
McDonald's fourth-quarter results offered a smidgen of positive
news, as McDonald's logged its first monthly increase in same-store
sales in the U.S. in more than a year. Yet that key metric, which
includes sales at McDonald's locations open at least 13 months,
rose just 0.4% in December, lower than the quick-serve-sandwich
category's gain of over 4%, Mr. Andres said.
In light of its stagnant sales, McDonald's said it is reducing
store openings in its hardest-hit markets: China, Russia, Germany
and the U.S., and cutting corporate overhead. Its $2 billion
capital spending budget for 2015 is the lowest in more than five
years.
McDonald's will direct more of that money toward projects like
customized ordering kiosks that are intended to engage young people
in the U.S. and other underperforming markets.
McDonald's is also selling more restaurants to franchisees to
reduce its exposure to commodity costs and other risks. For
instance, with sales struggling, McDonald's opted not to raise its
menu prices enough to offset higher food costs last year, which put
a dent in its margin.
McDonald's shares slid about 1.2% in early afternoon trading,
leaving them down more than 13% from their high last year, in
May.
Bill Smead, chief executive of Smead Capital Management, which
owns about 168,000 shares of McDonald's stock, said bad
expectations are largely baked into McDonald's share price now. His
fund has decreased its stake in McDonald's since problems surfaced
in 2012, but he said he's confident in the long-term potential.
"They have the best brand awareness, the best restaurant
locations," he said.
Overall, for the fourth quarter, McDonald's reported a profit of
$1.1 billion, or $1.13 a share, down from $1.4 billion, or $1.40 a
share, a year earlier. Revenue fell 7.3% to $6.57 billion. Analysts
polled by Thomson Reuters had expected earnings of $1.22 a share on
revenue of $6.68 billion.
McDonald's said global same-store sales fell 0.9%, including a
1.7% slide in the U.S. despite the uptick in December.
In the company's Asia-Pacific, Middle East and Africa region,
sales at existing locations fell 4.8%, as it continued to take a
hit from a scandal with one of its meat suppliers that was accused
of intentionally selling expired meat to restaurants in July.
McDonald's performance in the region has improved somewhat, and it
expects it to recover in three to six months.
In Europe, McDonald's sales fell 1.1% as consumer confidence
issues in Russia added to broader economic softness in France and
Germany. Russian authorities last year began inspecting many
McDonald's restaurants and shutting some, in a move widely seen as
retaliation for U.S. sanctions in response to Russia's military
incursion in Ukraine. While the closed stores are back in
operation, sharp drops in oil prices and the Russian currency have
hit the country's economy, leading McDonald's to expect continued
weakness in its business there.
Chelsey Dulaney contributed to this article.
Write to Annie Gasparro at annie.gasparro@wsj.com and Chelsey
Dulaney at Chelsey.Dulaney@wsj.com
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