“As our predominately franchised business model continues to generate significant levels of cash, our priorities regarding the use of cash have not changed. After investing in our business, we’re committed to returning all free cash flow to shareholders over the long term, first through dividend and then through share repurchases. For the second quarter, we returned $1.2 billion to shareholders through a combination of dividends and share repurchases.” – McDonalds President Thompson
“…fortifying our position as our customers’ favorite place and way to eat and drink.”
by McDonald’s Don Thompson, President and CEO
I’d like to begin by briefly framing our performance using three lenses. The past, the present, and the future.
First the past, because it provides perspective and guides our present and future. Throughout McDonald’s history, we respectively grown both the top and the bottom lines to varying degrees across a variety of economic and competitive cycles. We have an iconic brand an outstanding system of owner-operators, suppliers and employees and superb real estate locations in nearly every market around the world. This provides a solid foundation from which we operate.
Second, the present. In second quarter we grew revenues, operating income and earnings per share, despite the ongoing impact of the challenging environment. This is truly a testament to the fortitude and resilience of our system, our sustainable competitive advantages, and the collective focus on execution at our restaurants.
And third the future. We expect the dynamics of this cycle should persist in the near-term, namely flat to declining informal eating out markets, increasingly less ability to take price, cost pressures throughout our P&L and heightened competitive activity.
Based on our recent sales trends, our results for the rest of the year are expected to remain challenged.
Our second quarter results tells story consistent with these lenses. Global comparable sales were up 1%, operating income was up 3% and constant currencies and earnings per share was $1.38, a 6% increase in constant currencies. And as we begin the third quarter, global comparable sales are expected to be relatively flat in July. Based on our recent sales trends, our results for the rest of the year are expected to remain challenged.
We remain committed to the plan to winning our three global growth priorities to optimize our menu, modernize the customer experience, and to broaden accessibility to brand McDonald’s around the world. This customer centric plan enables us to deliver an appealing experience by offering great tasting, affordable food and beverages, and clean and modern restaurants.
At the same time, we are diligently implementing thoughtful adjustments to our proven strategies and solutions when and where needed. This flexibility has enabled us to maintain or grow market share in most of our major markets around the world.
Let’s review ours results in every geographic business units, starting with the United States, where comparable sales for the quarter were up 1% and operating income was flat. We continue to appeal to our customers with an increased emphasis on new news across our menu, and an ongoing focus on everyday affordable value.
The Dollar Menu remains a foundational component of our strategy
The Dollar Menu remains a foundational component of our strategy to consistently deliver value across the menu, rather than implementing aggressive short-term discounting tactics. At the same time, our focus on enhancing core classics and offering additional premium products, continues to provide customers with even more variety and choices across day parts and price points.
Premium McWraps launched in April, the Blueberry Pomegranate Smoothie and Egg White Delight debuted in May and last month we added fresh new taste to our Quarter Pounder Burgers with three new flavorful recipes, Bacon Habanero Ranch, Lettuce Tomato Deluxe and Bacon & Cheese.
This quarter we introduce new items across all four key growth categories, chicken, beef, breakfast and beverages. Premium McWraps launched in April, the Blueberry Pomegranate Smoothie and Egg White Delight debuted in May and last month we added fresh new taste to our Quarter Pounder Burgers with three new flavorful recipes, Bacon Habanero Ranch, Lettuce Tomato Deluxe and Bacon & Cheese.
From a comparable sales standpoint, these new menu additions individually met or exceed its targeted performance levels. However, softer IEO environment and comparisons against prior-year promotion was chicken and beverage activity offset the sales driven by the new menu news. And while June comparable sales were slightly negative in the U.S., we continue to outpace the competitive set.
In June, I met with our leadership franchisees while they were in Oak Brook for one their regularly scheduled meetings. While the challenges of operating a small business today are many, it is clear that we’re aligned and focused on what’s most important and that’s the customer. It’s that commitment to remaining customer centric, along with the assertive plans and vision we have in place, that enables all three legs of the McDonald’s system to grow sales and profitability for the long-term.
Let’s shift to Europe, where comparable sales were down 10 basis points for the quarter and operating income was up to 5% in constant currencies. The U.K. and Russia continue to deliver positive results, while weak performance in Germany and France persist. The UK’s business remain solid. Second-quarter results and continued market share growth were driven by a balanced focus across value core new products, and promotional offers.
The U.K. launch blended ice beverages in June, just in time to satisfy customers’ craving for something cool and refreshing during the summer months. The lineup includes two delicious fruit smoothies, strawberry and banana and mango and pineapple, and a line of frappes including Carmel and Iced Mocha.
Inspired by the U.S., these new products expand the overall beverage lineup and further validate blended ice as a proven system solution that can be deployed across markets worldwide. Russia also delivered positive performance for the quarter on top of last year’s strong results. In addition to a focus on the Big Mac, two seasonal premium offerings, the Royal Cheeseburger and The Big Tasty with Bacon, contributed to Russia’s performance and demonstrated the strong ongoing appeal of our brand in this growth market. We expect the lower inflationary environment in Russia to continue dampening our pricing power, pressuring near-term sales momentum compared to last year.
France, comparable sales in guest count performance remain negative as the recession continues
Moving over to France, comparable sales in guest count performance remain negative as the recession continues to pressure the informal eating out industry. However, we’re growing market share by balancing value in premium products across the menu. For example, France recently added two new recipes to the popular Casse-Croute entrée and drink combo, they contributed to market share growth during the lunch day part. This value offer was complemented by a strong focus on two premium beef burgers, Le M and Le 280.
Germany negative comparable sales and traffic trends persist.
In Germany negative comparable sales and traffic trends persist. Our traffic has declined at a faster rate than the IEO industry, which also continues to contract. It’s critical that our initiatives resonate with consumers in this environment and in this marketplace. So to reestablish our momentum, we are leveraging recent consumer insights and continuing to adjust our plans.
market share improved in China, Australia and Japan, comparable sales were negative for our big three markets. Positive performance in other markets like South Africa, Singapore and South Korea partially mitigated the overall segments decline.
Let’s shift to Asia Pacific, Middle East and Africa or APMEA. Comparable sales were down 30 basis points for the quarter and operating income increased 3% in constant currencies. Although market share improved in China, Australia and Japan, comparable sales were negative for our big three markets. Positive performance in other markets like South Africa, Singapore and South Korea partially mitigated the overall segments decline.
Markets across APMEA are taking a holistic approach to stimulating demand. Across day parts there are offering limited time and innovative products alongside established price value platforms. In Australia, we continued to grow market share by balancing our focus on the core with new product introductions and promotional activities. Strong performance in 2012 including the launch of our Loose Change menu along with external pressures in 2013 from lower levels of consumer spending and high competitive activity have contributed to weaker performance.
Japan, consumers remain extremely price sensitive
In Japan, consumers remain extremely price sensitive. Comparable sales have been positive the last two months and we continue to grow share by leveraging limited time offerings like the Chicken Teritama and sharing options such as the Mega Potato to keep customers coming back to our restaurants and to build our average check.
China, comparable sales were down 6.1%
In China, comparable sales were down 6.1% for the second quarter reflecting the negative impact from avian influenza which continues to dissipate. We remain focused on leveraging promotional activities to showcase the diversity of our menu beyond chicken and strengthening our connection with customers through our ongoing brand trust campaign that focuses on the quality and the safety of our food.
We remain confident in our ability to drive future performance in China. Going forward, comprehensive plans for our key growth areas particularly beverages, the family business and the late night day part remain our top priorities.
Around the world and across our system we are focused on ensuring our strategies and tactics resonate with customers. That’s the key, the key to our performance, today and for the long term. As I mentioned earlier, our market teams continue to strategically and thoughtfully adjust their plans in response to local consumer dynamics and growth opportunities.
At the same time, we remain committed to prudently investing our capital and resources in those initiatives that will further differentiate us from the competition for the long term. We’re broadening accessibility by adding new restaurants, we’re modernizing our existing restaurants with reimages and remodels and we continue to deploy technology and convenience initiatives.
our predominately franchised business model continues to generate significant levels of cash, our priorities regarding the use of cash have not changed
As our predominately franchised business model continues to generate significant levels of cash, our priorities regarding the use of cash have not changed. After investing in our business, we’re committed to returning all free cash flow to shareholders over the long term, first through dividend and then through share repurchases. For the second quarter, we returned $1.2 billion to shareholders through a combination of dividends and share repurchases.
In closing I want to reiterate my confidence in our business and in the growth opportunities that exists. We are diligently focused on executing the proven strategies within our plan to win. We have a resilient business model and aligned and talented system and an experienced management team.
We’re leveraging these strengths and making deliberate, continued progress toward winning this battle for market share and fortifying our position as our customers’ favorite place and way to eat and drink.