Monday, January 24, 2011

McDonald's Corp. (NYSE: MCD): Q4 Earnings Preview 2010

McDonald's Corp. (NYSE: MCD), the world's largest hamburger chain, is scheduled to release fourth-quarter earnings before the opening bell on Monday, January 24, 2011. Analysts, on average, expect the company to report earnings of $1.16 per share on revenue of $6.21 billion. In the year ago quarter, the company reported earnings of $1.03 per share on revenue of $5.97 billion.

McDonald's Corporation, together with its subsidiaries, operates as a worldwide foodservice retailer. The company operates more than 32,000 local restaurants in more than 100 countries.

In the preceding third quarter, the Oak Brook, Illinois-based restaurant operator's net income was $1.39 billion, or $1.29 a share, compared to $1.26 billion, or $1.15 a share, in the year-earlier quarter. On an adjusted basis, the company earned $1.32 a share in the latest quarter. Revenue increased 4% to $6.3 billion from $6 billion in the same quarter last year. Analysts, on average, expected the company to report earnings of $1.24 per share on revenue of $6.21 billion. The results were driven by value offerings and premium products, and a rise in comparable-store sales across all regions.The company also benefited from its strategy to renovate restaurants and innovate new menu offerings, which drove higher traffic in the reported quarter. Global comparable sales increased 6.0%, with the U.S. up 5.3%, Europe up 4.1% and Asia/Pacific, Middle East and Africa up 8.1%.

McDonald's performance has recently been helped by its compelling food and beverage value offerings, like the addition of Frappes to the McCafe line-up as well as the popularity of the Shrek-themed Chicken McNugget and Happy Meal promotions to motivate kids to eat more fruits, vegetables and dairy products.  

Last month, the company said that sales at all restaurants in operation for at least thirteen months grew 4.8% in November, driven primarily by strength in the US and European markets. For the month of October, global comparable sales - a measure of sales at all restaurants in operation for at least thirteen months - grew 6.5%, driven by growth across all markets. 

At its last earnings call in October, McDonald's noted that as foreign currencies have weakened, currency translation is expected to negatively impact fourth quarter earnings by $0.01 to $0.02 per share at current exchange rates.

McDonald’s expects food cost to increase 1% to 2% year over year in the U.S and slightly in Europe in the fourth quarter of 2010. However, for full year 2010, the company expects commodity cost to be down year over year.

For 2011, McDonald’s forecasts commodity cost to jump 2% in the U.S and labor cost to rise moderately. In Europe, the company expects commodity costs to increase approximately 3%. Based on these inflation expectations, management noted it would need to achieve same-store sales of 2-3% to grow margins next year.

The company anticipates capital expenditure for 2010 to be approximately $2.3 billion. Nearly half the amount will be reinvested in existing restaurants, including the refurbishment of over 1,800 locations worldwide. The rest will primarily be used to open about 1,000 restaurants.

The company is expanding aggressively in fast growing emerging markets. The fast food giant plans to boost investment in China and double its presence there by 2013. McDonald's has increased its investment in China by a substantial 25% in 2010. The company now plans to increase its investment in 2011 by 40%, which will mainly be used to speed up opening about 200 new restaurants, upgrade existing restaurants and the expansion of more convenient services. Further, it plans to add a few menu items next year that will target the ever health-conscious Chinese consumers. The new restaurant openings are planned in the bigger cities of China such as Shanghai and Beijing, with half of them being drive-through outlets. The company is also looking to change its franchise model in China to boost growth by licensing restaurants on a province basis rather than the current city basis. Also, it targets the redesigning of 80% of its existing outlets in China by 2013. 

However, stiff competition from other quick-service restaurant operators and macroeconomic factors influencing consumer spending patterns still remain concerns. Though the company has been reporting rise in same-store sales over the past months and has been faring better than its competitors, the persistent weakness in US market is now hurting the business of one of the world’s most recognizable brands.

In terms of stock performance, McDonald's shares have gained nearly 20 percent over the past year.

Full Disclosure: None.
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