McDonald's Posts Strong 4Q

McDonald’s Corporation (MCD - Analyst Report) posted fourth quarter 2011 earnings of $1.33 per share, surpassing the Zacks Consensus Estimate of $1.30. Fourth quarter earnings were 15% higher than the year-ago level of $1.16. The currency movements did not impact the quarterly results.

Value offerings and premium products coupled with higher comparable sales were primarily responsible for the earnings growth. The company also derived significant synergies from the “Plan to Win” program, which is aimed toward sustaining growth by driving restaurant visits, providing everyday value, innovating new menu items, and re-imaging restaurant and marketing campaigns. 

The company’s full-year earnings per share were $5.27 versus $4.58 in fiscal 2010. The currency favorably impacted the fiscal earnings by 19 cents per share.

Quarter Highlights

The world's largest hamburger chain said that revenues for the quarter climbed 10% to $6.82 billion, in line with the Zacks Consensus Estimate.

Revenues from company-operated restaurants rose 10% to $4.6 billion while revenues from franchise-operated restaurants jumped 9% to $2.2 billion. Total operating income grew 14% to $2.1 billion.

McDonald’s global comparable sales maintained its growth momentum with healthy margins on an expanding market share. Global comparable store sales rose 7.5% during the quarter with the U.S. comp up 7.1%, Europe up 7.3% and Asia/Pacific, Middle East and Africa (APMEA) up 6.9%.

Product innovation, along with value menu offerings like Chicken McNuggets, breakfast menu, McCafe beverage line up as well as everyday value options bolstered U.S. comps and led to a 15% growth in operating income. Additionally to drive traffic, McDonald’s continues to revamp its core offerings with variations on favorites like Chicken McNuggets and burgers and restaurant refurbishments.

In Europe, operating income grew 10% (12% in constant currency), despite the ongoing negative macro headlines in the region. The growth was backed by stronger performance in the U.K., France, Russia and Germany. Locally relevant menu choices, promotional food events, sustained focus on multiple-tier menu offerings and a restaurant reimaging program continued to drive market share gains.

In APMEA, operating income jumped 22% (19% in constant currency), driven by strong performance in many markets and continued focus on daypart value options, variety in menu as well as locally relevant items.

Company-operated expense and franchised restaurant occupancy expenses saw a spike of 10% and 5%, respectively, but selling, general and administrative expenses fell 1% from the prior-year quarter.

Fiscal Year Performance

McDonald’s revenues for 2011 surged 12% year over year to $27.0 billion. Revenues from company-operated restaurants rose 13% to $18.3 billion while the same from franchise-operated restaurants jumped 11% to $8.7 billion. Total operating income grew 14% to $8.5 billion.

McDonald’s global comparable sales increased 5.6% during fiscal 2011 with positive comparable sales across all geographical segments.

Financial Position

In 2011, McDonald’s returned $6.0 billion to its shareholders through share repurchases and dividend payments.

The company anticipates capital expenditure of approximately $2.9 billion for 2012. Nearly half the amount will be reinvested in existing restaurants and the remainder will primarily be used to open about new 1,300 restaurants.

Outlook

The company expects the positive trend to continue in 2012 and January global comparable sales to consequently increase in the range of 5.5% to 6.5%.

Our Take

The Oak Brook, Illinois-based company continues to drive same-store sales while maintaining healthy margins. We believe that revenues will grow through unit expansion and strong comps momentum over the next few quarters.

Based on a strong balance sheet and consistent earnings, the stock provides relative safety and moderate growth prospects due to its exposure to the fast-growing international markets. Moreover, the franchising strategy that is predominant in McDonald’s business model helps drive steady cash flow streams, solid margins and returns.

However, stiff competition from other quick-service restaurant operators, commodity pressure and macroeconomic factors influencing consumer spending patterns still remain areas of concern.

Consequently, the company has a Zacks #2 Rank (short-term Buy rating). We also reiterate our long-term Neutral recommendation.

One of McDonald’s primary competitors, Yum! Brands Inc. (YUM - Analyst Report), will announce its fourth quarter 2011 results on February 1, after the market closes. 

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