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McDonald's posts disappointing quarterly results

McDonald's Corp. is trying to prove that it has the right recipe for growth after another disappointing quarterly performance.

The world's largest restaurant company reported first-quarter sales and profit on Tuesday that missed Wall Street's expectations. Oak Brook-based McDonald's has now missed analysts' sales expectations in six of the last eight quarters and profit forecasts in five of the last eight quarters, according to Bloomberg data.

CEO Don Thompson tried to reassure Wall Street that he and his leadership team are taking the right measures to improve performance, particularly in the key markets of the United States, Germany, Australia and Japan, where results have been weak.

During the company's quarterly conference call, Thompson discussed four ways McDonald's can make improvements in those markets. He wants to strengthen the planning process using consumer insights, strengthen its marketing message, make value offers more consistent and clear for consumers and balance the chain's focus on the core menu items such as Big Mac, Egg McMuffin and French fries.

"It's important to underscore that it will take time for consumers to notice the changes and reward us with increased visits. This is not about a silver bullet," Thompson said.

Shares of McDonald's fell 41 cents to $99.26 in afternoon trading on the New York Stock Exchange.

Analysts remain concerned about the company's performance in the United States, where sales at existing locations have been falling for months and operating income fell 3 percent in the latest quarter. Many analysts say that McDonald's U.S. menu grew to have too many items on it, with everything from specialty drinks to chicken wraps. That lengthy list has taken the hamburger outlet away from what it is known for and led to longer wait times for customers.

"They don't seem to have the right focus," said Howard Penney, managing director Hedgeye Risk Management. "Their business is declining and others are growing," he said, pointing to other fast-food chains such as Jack in the Box and Sonic. "I don't know if I understand why the U.S. business is having such a tough time and why it's gone down so far, so fast."

Thompson, who has led McDonald's since July 2012, said he expects results in the four key markets to be volatile in the near term as the company tries to improve. Some efforts are already underway, such as working on service in the United States with everything from increased staffing during peak hours to adding prep tables that allow for easier order assembly, more flexibility for new toppings and customized orders.

Chief Financial Officer Pete Bensen said that the company would have more to say by the end of the second quarter about a variety of financial efforts. Those include working on refranchising restaurants outside of the United States and looking closely at general and administrative costs to see how company can allocate more funds to promising areas such as digital.

"They're not digging deep enough into the issues of the company to be able to come up with the right answers," said Penney.

McDonald's earned $1.2 billion, or $1.21 per share, down from $1.27 billion, or $1.26 per share, a year earlier. Revenue rose to $6.7 billion from $6.61 billion. Analysts were looking for a first-quarter profit of $1.24 per share on $6.73 billion in revenue.

"There is nothing to panic about there," Edward Jones analyst Jack Russo said of the quarterly profit. Russo, who has a "buy" rating on McDonald's, said one good piece of news is that McDonald's European operations continue to show improvement on a monthly basis, which is helping the company even as beef prices rise and it faces a strong U.S. dollar against foreign currencies.

The company said it has raised prices during the past year to help mitigate such concerns, including a price hike of about 3 percent in the United States.

Global sales at McDonald's restaurants open at least 13 months rose 0.5 percent during the quarter, coming in just ahead of analysts' forecast of a 0.4 percent increase, according to Consensus Metrix.

Same-store sales in the United States fell 1.7 percent, a steeper decline than the 1.4 percent analysts' estimate. Weather was to blame for most of the decline in U.S. same-store sales, Thompson said. Without that hit, same-store sales in the United States would have been relatively flat, he said.

The company suggested that things could be looking up, as global same-store sales in April should be "modestly positive." It did not give a forecast for U.S. sales.
Thompson largely shrugged off the competition from rivals in breakfast, a hot topic after Taco Bell came out in late March with a new menu and campaign that uses men named Ronald McDonald, and McDonald's held a two-week giveaway of small coffee during breakfast hours. Starbucks has also overhauled some of its products and competitors such as Dunkin' Donuts and Burger King have worked on improvements.

Breakfast is a key time for McDonald's and its strongest part of the day in terms of profits, he said. He said McDonald's breakfast gets "very, very high consumer scores."
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MCD data by YCharts

MCD data by YCharts

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