July 23--McDonald's reported a weak second quarter Thursday, but executives at the burger behemoth say there's reason to believe in the company's turnaround efforts.
However, while global sales comparisons are expected to turn positive in the third quarter, executives hold no such expectation for its U.S. business.
"Currently, the U.S. is a little bit of a drag," CEO Steve Easterbrook said during a conference call with analysts. "We're looking just to narrow that gap and return that business to growth. But we're not putting in anything significant for growth at all in the third quarter, but we're working hard towards getting it by the end of the year."
Still, he said cost-cutting and restructuring efforts, plus a recommitment to better service, food and value offered at McDonald's, has the company seeing "early signs of momentum."
"No one move will turn (around) a business that's been in decline for nearly three years," Easterbrook added. "And while recovery will be bumpy, I'm confident we're moving in the right direction."
On Thursday, McDonald's reported a profit of $1.2 billion, down 13 percent from the same period a year ago, and earnings per share of $1.26, down 10 percent from $1.40 a share in last year's second quarter. That topped the $1.23 earnings per share projected by analysts.
In the U.S., second-quarter sales at restaurants open at least 13 months, known as same-store sales, dropped a worse-than-expected 2 percent. The results were evidence that featured products and promotions, such as the Minions Happy Meal toys, didn't "achieve expected consumer response amid ongoing competitive activity," the company said.
Globally, same-store sales fell 0.7 percent globally, slightly worse than what analysts projected.
Many investors and analysts were looking past McDonald's second-quarter earnings, and the positive outlook for global sales is one cause for optimism, said R.J. Hottovy, a Morningstar analyst. The emphasis on empowering local markets in the U.S. in terms of menu and marketing decisions was also promising, he said.
"I actually walked away from the call feeling a little more encouraged, to be honest," Hottovy said, adding that the "overarching question" is when will the U.S. turnaround take shape.
Shares of McDonald's closed at $97.09 on Thursday, down 0.5 percent from Wednesday's close of $97.58 a share.
Easterbrook, hired in March, is tasked with trying to right the ship after a prolonged sales decline. The fast-food giant is battling fast-casual chains like Chipotle and Panera Bread for the attention of millennials, who are often seeking fresher, healthier cuisine.
So far, the turnaround has included cost-cutting measures and selling company-owned restaurants to franchisees. There have also been rumblings of McDonald's rolling out an all-day breakfast menu, though Easterbrook didn't commit to that, saying the idea continues to be tested in local markets.
A new mobile app for customers, something already available at Taco Bell, Wendy's, Subway and Chipotle, will launch in the third quarter, Easterbrook said.
In response to an analyst question on how all-day breakfast jibes with the company's idea of simplifying the menu, Easterbrook said the first step is proving customer demand for all-day breakfast. From there, operations would have to be streamlined in a way that allows for all-day breakfast without complicating other efforts at the restaurants.
Darren Tristano, executive vice president of Chicago-based food research firm Technomic, said he thought the plan for all-day breakfast could work logistically but questioned whether it would be enough to capture the attention of millennials who tend to seek out healthier options.
"I think they're making modest changes and, given their struggles for the past couple years, they need to take bigger risks," Tristano said.
He said he was "very optimistic" that McDonald's can rebound from its decline. But it won't be easy, he said, considering competition from other fast-food restaurants, fast-casual restaurants and even coffee chains are expanding their food options.
"They have to see it as a battle on a number of fronts," Tristano said.
Easterbrook said he expected positive global sales in the third quarter to be buoyed by the growth in the newly created "international lead market" -- which includes Australia, Canada, France, Germany and the United Kingdom -- and continued recovery from supplier problems in China.
In May, McDonald's announced plans to sell about 3,500 company-owned restaurants to franchisees by the end of 2018, up from a previous target of at least 1,500 restaurants by 2016. That would make 90 percent of its restaurants around the world run by franchisees, up from 81 percent.
McDonald's also reported a 6 percent decline in expenses that include salaries, to $592 million in the second quarter from $629 million in the same period a year ago. Earlier this year, the company announced layoffs of 120 people from its Oak Brook headquarters.
To help offset cost increases related to a minimum-wage hike and the rising cost of beef, the company said it raised prices at the end of May, meaning second-quarter prices were 2 percent higher than the same period last year.
gtrotter@tribpub.com
