Lawrence Meyers: McDonald’s (NYSE:MCD) investors could use a laugh, but even more so, the franchises could use laughing gas, because things are bad.
This has a lot to do with how McDonald’s treats its franchisees. It treats them like they own them, telling them to spend lots of money on upgrades and promotions, without knowing if they work.
When you combine that with shrinking sales, which are slow-cooking franchises, and the healthier and price-competitive chains like Chipotle (NYSE: CMG), you have a recipe for a really bad Big Mac.
This franchising problem is relevant as we look over McDonald’s second-quarter earnings report, released Thursday.
McDonald’s comparable store sales fell 0.7% in the quarter from a year earlier. U.S. comps dropped 2%. Thus, franchises are seeing less dollars spent in stores. It also shows us that company promotions and new products are failing, and that’s because there’s no cohesive vision around the company.
Lower comps for McDonald’s leads to lower revenues, and that means a 1% decline in constant currency revenues, but a 10% decline when factoring in the strong dollar. EPS was also down 1% in constant currency and 10% because of the strong dollar. This resulted from a 5.9% decline in operating income.
The Awful Bottom Line
The Asian region has ended its love affair with McDonald’s, as comps declined 4.5% and operating income fell a terrible 16% in constant currency and 26% thanks to the strong dollar.
Finally, we get to the awful bottom line in the second quarter, where net income fell from $1.387 billion to $1.202 billion, or 12.9%. Even though McDonald’s has about a billion dollars of cash and generates over $3.9 billion in free cash flow every year, I am hating the fact that it spends billions on stock buybacks instead of plowing that money into R&D and marketing.
How bad are things? If you run a franchise, you want the CEO to tell you something visionary.