McDonald's Corporation's (MCD - Analyst Report) third-quarter 2013 earnings of $1.52 per share beat the Zacks Consensus Estimate of $1.50 by 1.3% and also grew 6% year over year. Earnings in the quarter received a boost from the company’s higher top line and share repurchases.
Revenues surged 2.0% year over year to $7.32 billion during the quarter, driven by increased franchise as well as company-owned revenues. However, quarterly revenues missed the Zacks Consensus Estimate of $7.34 billion by 0.3%.
Though McDonald’s’ global comparable sales (comps) were positive for the third quarter, it was lower than the previous quarter as well as the year-ago level. Global comps were up 0.9% during the quarter versus 1.0% in the second quarter and 1.9% in the year-ago period. The decline in comps was due to the lower consumer spending resulting from the prevailing macroeconomic weakness.
Behind the Headlines Numbers
In the third quarter, revenues from company-operated restaurants were up 2% year over year to $4.92 billion while the same from franchise-operated restaurants increased 4% year over year to $2.40 billion.
In the United States, comps increased 0.7%, backed by the company’s menu innovation as well as value offerings. The restaurateur’s recently launched chicken, beef and beverage offerings are expected to be its major growth drivers in the region.
Operating income for the segment was up 5% year over year.
Europe saw comps growth of 0.2%, backed by solid performance in the U.K., France and Russia, offsetting the poor results in Germany. McDonald’s remains committed to product innovation, offering value menu and execution of stronger marketing messages to strengthen its position in the region.
Operating income was up 11% (8% in constant currencies) mainly driven by strong performances in the U.K., France and Russia.
In Asia/Pacific, Middle East and Africa (APMEA), comps slackened 1.4%. Operating income in APMEA was down 12% (decreased 4% in constant currencies). Weak performance in Australia, Japan and China were held responsible for such poor results.
In order to boost the segment’s comps, the company is focusing more on locally relevant items, expanding breakfast line-up as well as daypart value options, better services, convenience initiatives and restaurant developments.
During the quarter, the company paid $1.3 billion through dividend and share repurchase.
For the fourth quarter, management expects global comps to remain consistent with the recently reported quarter. However, margin is expected to go down same as the first quarter. Global comps are expected to remain flat in October.
Though, the company with its strong brand recognition continues to focus on its innovative offerings and premium products across all regions to boost its performance in the long term, the company expects its business to be pressurized in the near term due to prevailing macroeconomic concerns.
The fast-food chain is trying to perform better amid a challenging macroeconomic environment. McDonald's has succeeded in posting year-over-year rise in earnings and revenues in the past two quarters, gained by value propositions and menu innovation. Constant dividend hike irrespective of the economic peaks and valleys also reflects for the company’s inherent strength.
However, the Zacks Rank #3 (Hold) company has become extremely vulnerable to macroeconomic headwinds like debt concerns in Europe, decelerating growth in Asia and intense competition in the U.S. These factors justify our decision to remain on the sidelines on the company at the current level till its efforts to come out of the tough times yield results.
Some other players in the restaurant industry which look attractive at the current level include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), AFC Enterprises Inc. and Bob Evans Farms, Inc. (BOBE - Snapshot Report). While Red Robin holds a Zacks Rank #1 (Strong Buy), AFC Enterprises and Bob Evans Farms carry a Zacks Rank #2 (Buy).
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