McDonald’s sales improve but it faces a rocky recovery

Business improved 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,” Kempczinski said on Tuesday in a conference call with investors.

Of the chain’s 39,000 restaurants worldwide, 96 percent are now open, compared with 75 percent at the start of the second quarter. Comparable store sales that were down 39 percent in April were down only 12 percent by June.

The recovery is uneven, however. In general, stores with drive-through windows are recovering more quickly as customers try to limit contact, the company said. Restaurants in urban centres, 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 percent of sales, the company said.

In China, the pace of improvement has slowed from the spring as consumers remain wary of eating out. Kempczinski said he expects that pattern to extend into 2021.

In the United States, 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, US same-store sales continued to improve throughout July and should end the month slightly positive compared to a year ago. Nearly all US locations offer drive-through, and McDonald’s said it is also seeing an uptick in US delivery orders.

In McDonald’s key European markets – France, Germany and the United Kingdom- only two-thirds of restaurants offer drive-through, and customers were more accustomed to ordering at the counter. That has slowed recovery. In the UK, for example, restaurants were closed through May and dining rooms did not 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 $200m to support franchisee marketing during the second quarter. It also paid $31m to distribution centres – payments normally made by franchisees –  and $45m to cover franchisees’ debts.

McDonald’s said it expects to spend $200m – on top of previously planned marketing – in the second half of the year on ads promoting core menu items and delivery and drive-through.

The company said it will cut planned 2020 capital spending from $2.4bn to $1.6bn. As business resumes in the second half of the year, the company will help US franchisees complete around 900 remodelling projects.

McDonald’s said it plans to close 200 US 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 percent to $484m. 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 percent for the entire quarter, a point shy of analyst projections. In the US, McDonald’s biggest market, same-store sales fell 9 percent. Last year, they were up 8 percent in the same period. Same-store sales fell 41 percent in international markets.

Revenue fell 30 percent to $3.76bn, slightly ahead of expectations.

McDonald’s shares fell 2 percent to $197.18 in morning trading.