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Dow-30 Earnings: McDonald’s Corporation – Fourth Quarter 2013
Shares of McDonald's (MCD – Free McDonald’s Stock Report) climbed slightly after the restaurant operator reported fourth-quarter and full-year 2013 results that were unexciting. In the December term, sales rose 2% from a year earlier, to $7.093 billion, a hair below our $7.123 billion call. Global comparable-store sales dipped 0.1%, as a higher average check was offset by reduced guest traffic.
Looking at sales from a geographic perspective, Europe was the standout, as sales on the Continent climbed 1.0% in the fourth quarter. Results were particularly good in the United Kingdom, Russia, and France, partially offset by Germany. Breakfast expansion, an enhanced value menu balanced with premium offerings, and limited-time items all drove sales in the region. Things were worse on our shores, as comps fell 1.4% in the recently completed quarter. Limited-time offerings and the revamped Dollar Menu (now the Dollar Menu & More) were not enough to bring same-store sales into positive territory. We believe that increased competition was partially to blame. Too, the gains that the U.S. economy has made recently seem to have been concentrated near the top (those at the lower end of the income spectrum tend not to benefit as much from rising home and stock prices), keeping McDonald's core customers under pressure and careful with their spending. Still, the worst performer was the region comprised of Asia/Pacific, the Middle East, and Africa, where comps fell 2.4% due to weakness in Japan and relatively flat sales in China and Australia.
Given the modest top-line advance and slight decline in comps, earnings per share crept up by less than 2% from a year earlier in the December term, to $1.40, a penny shy of our call. Total operating expenses as a percentage of sales (up 59 basis points year over year) weighed on the bottom line, but a slight decrease in the tax rate helped. Too, stock repurchases made for more favorable per-share comparisons.
For the whole of 2013, McDonald's earned $5.55 a share on sales of $28.1 billion (comps were up 0.2%), reflecting modest year-to-year advances. The challenges the restaurant operator faced in the fourth quarter were present through much of the year.
More of the same is likely on tap as the company proceeds through 2014. Indeed, global comparable-store sales are expected to be flat in January. Stiff competition, slowing growth in Asia, and a tough job market for young and low-skilled workers both in the United States and in Europe are issues that are unlikely to disappear overnight. Of course, management is not sitting on its hands, and plans to spend roughly $3 billion this year to open 1,500-1,600 new restaurants and remodel another 1,000 units or more. Engaging customers, updating the menu, and improving customer service will likely be areas of focus to increase sales at home. Overseas, locally-relevant menus, more convenience, expanded breakfast, and ongoing affordability will probably be keys to success. We still think that earnings growth will pick up this year, but we have trimmed a nickel from our 2014 earnings call, which now sits at $5.95 a share.
With the modest bottom-line growth that we're looking for and the lackluster gains posted by MCD over the past year (capital appreciation did not keep up with the broader market averages during 2013's further bull run), shares of McDonald's are certainly not as glamorous as some other equities, but that does not mean they are without investment merit. Conservative investors with a focus on income are definitely the target audience here, and for good reason. Management returned $4.9 billion to shareholders through dividends and stock repurchases last year, a figure that is likely to increase in 2014. We also like the company's impressive Financial Strength rating, as well as the equity's top scores for Safety, Price Stability, and Earnings Predictability. Although we don't see any major near-term growth catalysts at present, we also think the downside is limited at the recent quotation.
About The Company:McDonald's is a quick service restaurant with over 35,000 locations in more than 100 countries (as of December 31, 2013). The majority of the restaurants (over 80%) are operated by franchisees or affiliates. The company is best known for its hamburgers and French fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.