Shares of McDonald's (MCD – Free McDonald’s Stock Report) fell modestly after the restaurant operator and Dow-30 component reported first-quarter results that were slightly below our expectations. The company earned $1.26 a share on sales of $6.605 billion, versus our calls of $1.27 and $6.675 billion, respectively. Still, these figures were up modestly from the year-earlier period, when McDonald's earned $1.23 a share on revenues of $6.547 billion.
The company faced a number of challenges in the March term, including difficult year-over-year comparisons (the first quarter of 2012 contained an extra day due to leap year and was unseasonably warm) and global economic headwinds, such as tax increases in the United States, still-shaky conditions in Europe, and softness in Asia. After slipping 1.9% in January and 1.5% in February, it was not too surprising that global comparable-store sales fell 1.0% in the quarter (comps were up 7.3% in the year-earlier period). Turning to profitability, total operating costs and expenses as a percentage of sales ticked up 50 basis points from a year ago. However, share earnings got a boost from a lower tax rate and stock repurchases.
Breaking things down by geography, The United States and Europe were quite similar, with same-store sales dipping 1.2% at home and 1.1% on the Continent. The eating-out environment was challenging on our shores, but McDonald's was able to win market share thanks to its focus on value, new products, and remodeled restaurants. Across the Atlantic, continued economic uncertainty weighed on sales, and weakness in Germany offset better performances in the United Kingdom and Russia. The region comprised of Asia/Pacific, the Middle East, and Africa was the laggard, with comps falling 3.3%, due to negative results in China and softness in Japan.
Looking ahead, we believe that McDonald's will continue to operate against a difficult economic backdrop. In the U.S., conditions in the housing and labor markets are improving, though unemployment remains elevated, and consumers are still keeping a watchful eye on where they spend their money. Meantime, Europe's economic malaise is likely to continue, and growth in Asia is easing. Despite these hurdles, McDonald's is in a good position to succeed and pick up market share, thanks to its strong brand and impressive global infrastructure. A focus on value, convenience, menu innovation, new restaurants in overseas markets and remodeled stores at home should all help the company increase sales and earnings nicely this year (stock repurchases should also boost per-share earnings). Meantime, same-store sales comparisons ease as the year progresses. While management indicated that April comps are trending slightly negative (to the dismay of those hoping for a faster recovery), we believe this trend will reverse course later this year.
At this point, we are maintaining our full-year 2013 share-net estimate of $5.80. As for the stock, it has been on a nice run so far in 2013, although this has discounted some of its long-term appeal. All told, value investors may want to tread carefully, but we still think these shares are worthwhile for conservative accounts with a focus on dividend income and total return.
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.