McDonald's facing uneven recovery, 2Q sales down 30%
Business did improve for McDonald’s throughout the second quarter as restrictions lifted across the globe, but the fast food giant faces a bumpy — and expensive — recovery.
McDonald's President and CEO Chris Kempczinski said the coronavirus pandemic continues to cause uncertainty and depress consumer sentiment But he believes the April-June period will be the trough in the company's performance.
“McDonald’s has learned to adjust our operations to this new environment,” Kempczkinski said Tuesday in a conference call with investors.
Of the chain's 39,000 restaurants worldwide, 96% are now open, compared with 75% at the start of the second quarter. Comparable-store sales that were down 39% in April were down only 12% by June.
The recovery is uneven, however. In general, stores with drive-thru windows are recovering more quickly as customers try to limit contact, the company said. Restaurants in urban centers, malls and tourist locations are having a harder time.
In some markets, like Australia and Japan, sales are already running ahead of 2019. Australia has seen big increases in delivery orders, which now make up 10% of sales, the company said.
In China, the pace of improvement has slowed from the spring as consumers remain wary of eating out. Kempczkinski said he expects that pattern to extend into 2021.
In the U.S., McDonald’s put on the brakes. After reopening 2,000 dining rooms with reduced seating, the company paused reopenings in early July as coronavirus cases spiked. Last week, McDonald’s said it will delay dining room reopenings for at least another month and will require face masks for anyone entering its restaurants.
Still, U.S. same-store sales continued to improve throughout July and should end the month slightly positive compared to a year ago. Nearly all U.S. locations offer drive-thru, and McDonald's said it's also seeing an uptick in U.S. delivery orders.
In McDonald's key European markets — France, Germany and the U.K. — only two-thirds of restaurants offer drive-thru, and customers were more accustomed to ordering at the counter. That has slowed recovery. In the U.K., for example, restaurants were closed through May and dining rooms didn't start reopening until this month.
McDonald’s is spending heavily to convince customers to come back, particularly for breakfast. The Chicago company spent more than $200 million to support franchisee marketing during the second quarter. It also paid $31 million to distribution centers — payments normally made by franchisees — and $45 million to cover franchisees' debts.
McDonald's said it expects to spend $200 million — on top of previously planned marketing — in the second half of the year on ads promoting core menu items and delivery and drive-thru.
The company said it will cut planned 2020 capital spending from $2.4 billion to $1.6 billion. As business resumes in the second half of the year, the company will help U.S. franchisees complete around 900 remodeling projects.
McDonald's said it plans to close 200 U.S. restaurants this year, about half of which are low-volume locations in Walmart stores. The company is going ahead with the construction of 400 new restaurants in China.
McDonald’s said second-quarter net income fell 68% to $484 million. Earnings, adjusted for one-time items, were 66 cents per share, well short of the 74 cents Wall Street was looking for, according to a survey by FactSet.
Same-store sales fell 24% for the entire quarter, a point shy of analyst projections. In the U.S., McDonald’s biggest market, same-store sales fell 9%. Last year, they were up 8% in the same period. Same-store sales fell 41% in international markets.
Revenue fell 30% to $3.76 billion, slightly ahead of expectations.
McDonald's shares fell 2% to $197.18 in morning trading.