MCD McDonalds Corp

By Heather Haddon 

McDonald's Corp. profit suffered a deeper-than-expected drop, as the coronavirus shut restaurants around the globe and forced the chain to spend tens of millions of dollars to help keep its franchisees operating.

For its second-quarter ending in June, McDonald's reported earnings per share adjusted for one-time items of 66 cents per share, down 68% from the prior year's period. Analysts had expected earnings of 74 cents a share.

The burger giant said Tuesday that its global same-store sales fell 24% during the quarter, slightly worse than analysts' expectations. The period included April and May, when the company said consumer spending fell particularly hard compared with last year.

McDonald's shares fell 1% to $199 in early trading Tuesday.

The coronavirus has stripped sales from companies spanning airlines to manufacturers while also forcing them to spend on protective equipment for workers and operation changes to continue doing business. Uncertainty over the course of the pandemic is also clouding corporate planning as coronavirus cases rise.

"In many markets around the world, most notably in the U.S., the public health situation appears to be worsening," McDonald's CEO Chris Kempczinski said in a call with investors.

McDonald's said it spent $200 million since the pandemic hit to help franchisees advertise their restaurants to try to boost sales. It paid $31 million for supply-chain expenses incurred by owners and it allocated $45 million during the quarter to cover unpaid franchisee bills.

Restaurant margins fell 25% during the period as owners spent on personal-protection equipment for workers and free meals for first responders, McDonald's said.

McDonald's executives have said that the spending on its restaurant owners is a good use of its cash to help them navigate a difficult period. It said it expected limited operations and big changes in consumer behavior as a result of the virus to continue to hurt sales.

The chain's shares were up 2% year-to-date as of Monday's closing price of $201.25. The S&P 500 index for U.S. restaurants was down 3% over the same period.

Mr. Kempczinski said that the company's sales are improving as more of its markets reopen. As of last month, 96% of McDonald's restaurants globally were operating, up from 75% in April.

To-go sales have helped McDonald's U.S. operations, where nearly 95% of locations have drive-throughs. Drive-throughs accounted for nearly 90% of U.S. sales in the quarter. McDonald's reported U.S. same-store sales declines of 9%, in line with expectations. The international markets it runs reported the biggest same-store sales drop at 41%, reflecting mandated closures in several European countries after the virus first struck. McDonald's international business also has fewer locations with drive-throughs.

McDonald's said weak breakfast sales hurt its U.S. business as the coronavirus continues to upend commuting routines. Mr. Kempczinski said competitors had flooded into breakfast when McDonald's lessened its focus on the meal. The company plans to do more breakfast-related advertising and to introduce new morning products.

McDonald's removed dozens of menu items to simplify operations during the pandemic. Mr. Kempczinski said that the company will add back some items, but that others will remain off and the decisions will vary by market.

The burger giant is likely to continue to depend on drive-throughs for the short term. It has limited dine-in service in about 2,000 U.S. locations, up from 1,000 in early June, but it is holding off on reopening any more U.S. dining rooms for indoor service for another month. For those dining rooms that are open, McDonald's is requiring customers to wear masks when entering its U.S. stores starting next month, joining a growing number of businesses that are going beyond local safety requirements to try to stop the virus's spread.

McDonald's said it expects to close roughly 200 U.S. restaurants during its fiscal year, an acceleration of planned closings. Over half of the U.S. closures are lower-volume restaurants in Walmart Inc. store locations, McDonald's said. The chain expects to open 950 restaurants globally this year.

The company expects to spend $1.6 billion on capital improvements this fiscal year, down from $2.4 billion originally projected. Half of the spending will go to U.S. projects, particularly store upgrades, the chain said. McDonald's didn't give further guidance for the year.

For the quarter, McDonald's reported $3.8 billion in sales, ahead of analysts polled by FactSet. The company said it had earnings of 65 cents a share on $484 million in profit, down around 67% from last year's period.

Write to Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

July 28, 2020 10:33 ET (14:33 GMT)

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