McDonald's Misses Q2 Earnings & Revenues on Sluggish Comps

McDonald's Corporation's MCD reported adjusted earnings of $1.40 per share in the second quarter of 2014, which missed the Zacks Consensus Estimate of $1.43 by 2.1%. However, it increased 1.4% year over year driven by an increase in revenues and lower share count.

 

 

 

Behind the Headlines Numbers

 

In the quarter, revenues from company-operated restaurants increased 1.0% to $4.79 billion. Revenues from franchise-operated restaurants were up 3.0% to $2.40 billion.

 

Global comps remained flat year over year compared to an increase of 0.5% in the prior quarter due to negative guest traffic at all its major segments partially offset by higher average check.

 

In the United States, comps decreased 1.5% compared to a decline of 1.7% in first quarter 2014. The sluggish comps reflect negative guest traffic amid ongoing broad-based challenges. Broad-based challenges reflect difficult economic conditions, marked by a sluggish job environment and stiff competition. However, operating income in the U.S. was up 1.0% year over year.

 

Comps in Europe declined 1.0% that compared unfavorably with 1.4% increase in the prior quarter. The downside reflects ongoing weakness in Germany, partially offset by improved performance in U.K and France on the back of an improved beverage and breakfast business. Operating income in Europe was flat year over year.

 

APMEA reported comps growth of 1.1% better than 0.8% growth in the first quarter of 2014. The upside reflects solid comparable sales performance in China and many other markets, which was somewhat offset by weakness in Japan. Enhanced value offerings and new store development also contributed to the results. However, operating income for APMEA declined 2.0%.

 

Total operating costs and expenses nudged up 2.2% year over year to $4.99 billion.

 

Guidance

 

The company expects comps for the month of July to be negative.

 

Share Repurchase Update

 

The company returned $1.6 billion to shareholders through dividends and share repurchases, under its three-year cash return target. Per its cash return target, the company intends to return wealth in the range of $18.0 billion to $20.0 billion over a 3-year period from 2014 to 2016 via dividends and share repurchases. This represents an increase of 10.0% to 20.0% over the amount of cash returned from 2011 to 2013.

 

Our Take

 

The U.S. business accounts for 30.0% of the fast-food giant's overall revenue. The region has not been able to post positive comps since Oct 2013 mainly due to heightened competition and a few wrong decisions that have slowed service.

 

Competition intensified for McDonald's with food chains like Burger King Worldwide Inc. BKW offering discounts. Wrong decisions like introduction of too many items in 2013 led to a slowdown in service and inaccurate orders. Currently, the company is trying to boost breakfast revenues by introducing variations of items already on its menu instead of making new offerings.

 

Going forward, we remain wary of the intense competition in the U.S. along with sluggish economic recovery in some of the company's primary markets, which would pressure its business in the near term.

 

The company is also making marketing and promotional offerings. However, these initiatives are yet to reap benefits and convert into positive numbers for the region. Moreover, the company's focus on innovative offerings and premium products across all regions is expected to boost its performance in the long term.

 

McDonald's currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include Chipotle Mexican Grill, Inc. CMG, Domino's Pizza, Inc. DPZ and Noodles & Company NDLS. All these stocks carry a Zacks Rank #2 (Buy).