McDonald’s Earnings Helped By Value Meals But Near-Term Outlook Remains Challenging

McDonald’s Corporation (NYSE:MCD) announced its Q4 results which were boosted by value meals and limited-time offerings such as the McRib sandwich. Net revenues grew 2% to $7 billion while the net income rose to $1.40 billion or $1.38 per share from $1.38 billion or $1.33, a year earlier.

Although the company’s comparable sales were flat in December, the U.S. sales were better than expected with figure rising 0.9%. ^[1] Comparable sales, or same-store sales growth, is an important measure to gauge a restaurant’s performance since it only includes the restaurants open for more than a year and excludes the effect of currency fluctuation.

McDonald’s exceeded its own target of adding 900 net restaurants globally in 2012. It opened 970 new restaurants, and more than half were in Asia-Pacific and the Middle East. The number of restaurants rose by 241 in China alone. In 2013, the world’s biggest fast food chain plans to accelerate the global additions to 1200-1300.

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What Next ?

We expect same-store sales to remain weak in the first quarter of 2013. In fact, during the earnings call, management reported that the figure for January was trending negative. A warmer winter resulted in better than expected sales last year. For example, in December 2011, the company’s comparable sales surged 9.6%. In January 2012, they jumped 6.4%. ^[2] Thus, topping the previous year sales will be an difficult task, especially if the global economy is weak.

The company-operates stores’ margins will remain under pressure since the focus domestically as well as internationally is on value meals. Value meals generally have lower margins and are used by the company to attract more customers. Once the customers come in, the restaurant chain hopes they will spend on other more expensive (and more profitable) items. In the fourth quarter, margins fell to 17.8% from 18.7% a year earlier due to higher food and labor costs. McDonald’s expects the cost of raw materials to increase 1.5-2.5% in the U.S. and 3-4% in Europe in 2013.

Since the company doesn’t incur the food and labor expenses for its franchised restaurants, its franchised margins tend to remain stable. They stood at 82.9% in the fourth quarter, compared to 83.1% in the previous year quarter. For the full year, they were flat at 83.%. Consequently, going forward, we don’t expect any significant deviation from the current set of numbers.

We have a $93.60 price estimate for McDonald’s, which is in line with the current market price. We are in the process of revising our estimates to incorporate the latest earnings.

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1. MCD 8-k [↩]
2. McDonald’s Is Expecting Decline in January Sales, January 23, 2012, nytimes.com [↩]