Closures, Costs Dent McDonald's Profit -- WSJ
July 29 2020 - 3:02AM
Dow Jones News
By Heather Haddon
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 29, 2020).
McDonald's Corp. profit suffered a deeper-than-expected drop, as
the coronavirus shut restaurants around the globe and forced the
chain to spend tens of millions of dollars to help keep its
franchisees operating.
For its second-quarter ending in June, McDonald's reported
earnings per share adjusted for one-time items of 66 cents per
share, down 68% from the prior year's period. Analysts had expected
earnings of 74 cents a share.
The burger giant said Tuesday that its global same-store sales
fell 24% during the quarter, slightly worse than analysts'
expectations. The period included April and May, when the company
said consumer spending fell particularly hard compared with last
year.
McDonald's shares fell 1% to $199 in early trading Tuesday.
The coronavirus has stripped sales from companies spanning
airlines to manufacturers while also forcing them to spend on
protective equipment for workers and operation changes to continue
doing business. Uncertainty over the course of the pandemic is also
clouding corporate planning as coronavirus cases rise.
"In many markets around the world, most notably in the U.S., the
public health situation appears to be worsening," McDonald's CEO
Chris Kempczinski said in a call with investors.
McDonald's said it spent $200 million since the pandemic hit to
help franchisees advertise their restaurants to try to boost sales.
It paid $31 million for supply-chain expenses incurred by owners
and it allocated $45 million during the quarter to cover unpaid
franchisee bills.
Restaurant margins fell 25% during the period as owners spent on
personal-protection equipment for workers and free meals for first
responders, McDonald's said.
McDonald's executives have said that the spending on its
restaurant owners is a good use of its cash to help them navigate a
difficult period. It said it expected limited operations and big
changes in consumer behavior as a result of the virus to continue
to hurt sales.
The chain's shares were up 2% year-to-date as of Monday's
closing price of $201.25. The S&P 500 index for U.S.
restaurants was down 3% over the same period.
Mr. Kempczinski said that the company's sales are improving as
more of its markets reopen. As of last month, 96% of McDonald's
restaurants globally were operating, up from 75% in April.
To-go sales have helped McDonald's U.S. operations, where nearly
95% of locations have drive-throughs. Drive-throughs accounted for
nearly 90% of U.S. sales in the quarter. McDonald's reported U.S.
same-store sales declines of 9%, in line with expectations. The
international markets it runs reported the biggest same-store sales
drop at 41%, reflecting mandated closures in several European
countries after the virus first struck. McDonald's international
business also has fewer locations with drive-throughs.
McDonald's said weak breakfast sales hurt its U.S. business as
the coronavirus continues to upend commuting routines. Mr.
Kempczinski said competitors had flooded into breakfast when
McDonald's lessened its focus on the meal. The company plans to do
more breakfast-related advertising and to introduce new morning
products.
McDonald's removed dozens of menu items to simplify operations
during the pandemic. Mr. Kempczinski said that the company will add
back some items, but that others will remain off and the decisions
will vary by market.
The burger giant is likely to continue to depend on
drive-throughs for the short term. It has limited dine-in service
in about 2,000 U.S. locations, up from 1,000 in early June, but it
is holding off on reopening any more U.S. dining rooms for indoor
service for another month. For those dining rooms that are open,
McDonald's is requiring customers to wear masks when entering its
U.S. stores starting next month, joining a growing number of
businesses that are going beyond local safety requirements to try
to stop the virus's spread.
McDonald's said it expects to close roughly 200 U.S. restaurants
during its fiscal year, an acceleration of planned closings. Over
half of the U.S. closures are lower-volume restaurants in Walmart
Inc. store locations, McDonald's said. The chain expects to open
950 restaurants globally this year.
The company expects to spend $1.6 billion on capital
improvements this fiscal year, down from $2.4 billion originally
projected. Half of the spending will go to U.S. projects,
particularly store upgrades, the chain said. McDonald's didn't give
further guidance for the year.
For the quarter, McDonald's reported $3.8 billion in sales,
ahead of analysts polled by FactSet. The company said it had
earnings of 65 cents a share on $484 million in profit, down around
67% from last year's period.
Write to Heather Haddon at heather.haddon@wsj.com
(END) Dow Jones Newswires
July 29, 2020 02:47 ET (06:47 GMT)
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