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McDonald's Corporation's (MCD - Analyst Report) second-quarter 2013 earnings of $1.38 per share missed the Zacks Consensus Estimate by 1.4% but grew 4.5% year over year. Top-line improvement and share repurchases boosted the year-over-year earnings growth.

Revenues increased 2.4% year over year to $7.1 billion during the quarter, in line with the Zacks Consensus Estimate. The increase in sales can be attributed to the company’s sales-driven initiatives and higher franchise as well as company-owned revenues.  

McDonald’s global comparable sales (comps) remain positive for the quarter, but were below the year-ago level. The company witnessed a 1.0% upside in comps for the quarter, lower than the year-ago level of 3.7%. The drop was due to the prevailing macroeconomic weakness which led to lower consumer spending.

Behind the Headlines Numbers

In the second quarter, revenues from company-operated restaurants were up 2% to $4.8 billion while the same from franchise-operated restaurants were up 4% to $2.3 billion.

In the United States, comps increased 1.0%. Comps in the quarter were backed by the company’s menu innovation as well as value offerings. The higher demand for the company’s core offerings was one of the major contributors in the quarter.

Operating income for the segment remained consistent year over year.

Europe witnessed a comps decline of 0.1% due to poor performance in Germany and France and reduced guest count. Austerity measures due to lingering debt concerns probably obliged cash-stripped customers to dine out less, which in turn took a toll on traffic.

However, operating income was up 5% (same in constant currencies) mainly driven by strong performances in the U.K. and Russia.

In Asia/Pacific, Middle East and Africa (APMEA), comps slackened 0.3%. Australia, Japan and China were the dampeners in the quarter. Operating income in APMEA was down 1% (increased 3% in constant currencies).

Offering a value menu, expansion in breakfast lineup, better service and convenience initiatives and restaurant developments remain the areas of focus in this segment.

Through dividend and share repurchase, the company has paid $1.2 billion during the quarter.


For the month of July, management expects global comps to remain flat year over year. Moreover, the company now expects that the second half of 2013 will be under pressure due to sluggish industry sales.

However, the company with its strong brand recognition continues to focus on its innovative offerings and premium products across all regions to boost its performance, going ahead.

Our Take

McDonald's is consistently striving to bounce back amid a challenging macroeconomic environment by resorting to value-propositions and menu innovation. Although McDonald’s has been faltering for quite some time, it has posted a year-over-year rise in earnings and revenues in the second quarter. The burger chain is also gaining momentum in its U.S. business.

However, the Zacks Rank #3 (Hold) company’s comps performance in the reported quarter was below par, as the company is facing headwinds like implementation of austerity measures in Europe and decelerating growth in some regions of Asia. Thus, we prefer to remain on the sidelines at the current level till the company’s efforts to come out of the tough times bear fruits.

Some other players in the restaurant industry which look attractive at the current level include Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report), Jack in the Box Inc. (JACK - Snapshot Report) and Burger King Worldwide, Inc. (BKW - Analyst Report). All these companies carry a Zacks Rank #1 (Strong Buy).

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