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McDonald's Corporation's (MCD - Analyst Report) first-quarter 2013 earnings of $1.26 per share missed the Zacks Consensus Estimate by a penny but grew 2% year over year. Flat net income coupled with share repurchases drove the year-over-year earnings growth.

Revenues nudged up only 1.0% year over year to $6.61 billion during the quarter, missing the Zacks Consensus Estimate of $6.64 billion. The muted increase in sales can be attributed to a 1% decline in global comparable store sales (comps) and tough year-over-year comparison owing to an extra operating day in the year-ago period.  

Behind the Headlines Numbers

In the first quarter, revenues from company-operated restaurants were flat at $4.45 billion while the same from franchise-operated restaurants were up 2.0% to $2.16 billion.

In the United States, comps declined 2.0% mainly due to a difficult eating-out environment. Dollar-menu, menu innovation and re-imaging failed to drive comps in the quarter. Operating income for the segment also declined 3% year over year.

Europe witnessed a comps decline of 1.1% due to reduced guest count. Austerity measures arising out of lingering debt concerns probably made cash-stripped customers dine out less, which in turn took a toll on footfall. The contribution from value-menu, premium products and restaurant reimaging were offset by the ongoing concerns in the region.

However, operating income was up 1% (same in constant currencies) mainly driven by strong performances from UK and Russia. However, Germany was a dampener in the quarter.  

In Asia/Pacific, Middle East and Africa (APMEA), comps slackened 3.3%. Japan and China were the laggards in the quarter.  Japan is struggling to recover from the after-effects of last year’s natural calamities, which is restricting consumers from dining out. Operating income in APMEA was down 1% (up 2% in constant currencies).

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

Outlook  

For the month of April, management expects global comps to be slightly negative. Also the company expects near-term bottom-line growth to reel under pressure while the top line will improve on the back of easy comparisons.

For 2013, McDonald’s plans to spend about $3.2 billion, up from $2.9 billion in 2012, given the plans for 1,500 -1,600 new restaurant openings and over 1,600 reimages.

Our Take

The Oakbrook, Ill.-based fast food giant continues to struggle. After recording a decline in comps in the first quarter, management further guided a monthly decline in comps for April. McDonald’s has become extremely vulnerable to a fragile macro economy.

Going forward, increasing fear as a result of the recent outbreak of H7N9 Avian flu will likely affect the performance of McDonald’s China. Geographically, the performance of France and Germany in Europe and Japan in Asia are expected to be soft due to the ongoing macro tension.

The company has little pricing power in Europe due to wavering consumer confidence. With increased focus on value proposition, less pricing power and increasing investments toward media, margins will likely suffer, going ahead.

However, investors should also note that McDonald’s will likely face easy comparisons across the globe as the year 2013 progresses. We prefer to remain on the sidelines until we see how its efforts help it to come out of the tough time.

McDonald’s currently carries a Zacks Rank #3 (Hold). Two of its peers, Brinker International Inc. (EAT - Analyst Report) and Yum! Brands Inc. (YUM - Analyst Report) will likely report their third-quarter and first-quarter earnings respectively on Apr 23. Another peer The Wendy's Co. (WEN - Analyst Report) is expected to report its first-quarter earnings on May 8.
 

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