Shares of McDonald's (MCD – Free McDonald’s Stock Report) fell after the restaurant operator and Dow-30 component released second-quarter results that fell a bit short of investors' expectations. Sales climbed 2% year over year, to $7.084 billion, slightly below our $7.145 billion estimate. Likewise, earnings of $1.38 a share were just shy of our $1.40 call, but up nearly 5% from the comparable 2012 period. Management's comment that ``results for the remainder of the year are expected to remain challenged'' didn't boost investors' confidence, either.
McDonald's faced a difficult operating environment in the June interim, as growth in Asia slowed, Europe remained mired in economic malaise, and customers in the United State were still cautious with their spending. (On our shores, the Commerce Department recently reported that sales at food service and drinking establishments fell a steep 1.2% sequentially in the month of June.) After declining 0.6% in April, global comparable-store sales rebounded in May, advancing 2.6%. For the second quarter, comps rose 1.0% against a 3.7% same-store sales gain in the year-earlier period. Moving down the income statement, SG&A expenses as a percentage of sales fell, but the overall operating margin slipped 14 basis points. Interest costs declined as a percentage of the top line, and the company's tax rate was down from a year earlier. A lower share count also aided per-share comparisons, but unfavorable currency movements weighed on the bottom line by about $0.02.
Breaking it down by geography, domestic operations fared the best, and comps rose 1.0% in the U.S. thanks to new products in the four key growth areas of chicken, beef, breakfast, and beverages. Meantime, the Dollar Menu remained popular with value-conscious diners, while classic sandwiches and sides also did well. In Europe, same-store sales were down 0.1%, as solid results in Russia and the United Kingdom were offset by weakness in Germany and France. Comps were slightly worse in the region comprised of Asia/Pacific, the Middle East, and Africa. The majority of markets here were positive, but declines in China, Australia, and Japan took a toll.
We look for the operating environment to remain challenging in the second half of the year, as many of the same headwinds that hurt McDonald's in the second quarter appear likely to persist. Indeed, the company indicated that same-store sales are expected to be flat in July. On the bright side, comparisons ease as the year progresses, which should help boost profitability on a year-over-year basis in the third and fourth quarters (due to fixed-cost leverage). Additionally, the company's powerful global brand and impressive infrastructure ought to help it gain market share, despite stiff competition from other quick service restaurant operators. New and remodeled stores, combined with a relentless focus on value, convenience, and menu innovation, should drive the top and bottom lines higher this year. Still, due to the second-quarter earnings miss, unfavorable currency movements, and recent sales trends, our preliminary take is that earnings will come in around $5.65 a share this year, a nickel below our previous call.
As for the stock, it probably won't wow momentum investors due to recent earnings misses and near-term headwinds. However, conservative buy-and-hold investors will likely find the issue's long-term total return potential worthwhile, especially after the recent modest price retracement, given a combination of the equity's above average dividend yield, top score for Safety, and below market Beta.
About The Company:McDonald's is a quick service restaurant with 34,480 locations in 119 countries (as of December 31, 2012). 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.