) third quarter earnings failed to enthuse investors as the company
reported a weak set of numbers. Total revenues for the quarter rose
2% to $7.3 billion, helped primarily by new restaurant additions.
The net income jumped 5% to $1.5 billion or $1.52 per share. Shares
of the company were flat in the post market trading.
We have a
$97 price estimate for McDonald's
, which is slightly above the current market price.
Weak Sales Cause For Concern
McDonald's same-store sales could only manage to grow 0.9%,
highlighting the woes of the fast food giant. The company blamed
weak consumer sentiment in its major markets as the primary reason
for the tepid sales. However, some of the other restaurant chains
such as Starbucks, Dunkin' Donuts, Chipotle etc. have been
performing better than McDonald's. Therefore, blaming the
disappointing sales entirely on a precarious macroeconomic
environment raises the doubt if the management is struggling to get
its strategy right.
McDonald's weak same-store sales during the first half of the
year were justified since the restaurant faced a difficult
year-over-year comparison. Now that the comparisons have eased,
weak sales are a cause for concern. The results also highlight that
the recent introduction of Chicken McWraps and Mighty Wings have
not lived up to expectations.
Comparable sales, or same-store sales, 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
Margins Under Pressure
The reported margins for company-operated margins declined 40
basis points to 18.7%. Operating margins have been under pressure
since the last year due to a greater proportion of sales coming
from lower margin products such as from the Dollar menu. Beginning
from the second half of 2012, McDonald's added a number of items to
its Dollar menu such as the Grilled Onion Cheddar Burger and
McChicken sandwich in order to entice more customers.
However, sales haven't grown at a rate the company would have
ideally wanted it to. This has consequently resulted in
margin erosion. Weak sales also cause the fixed costs (such as
labor, occupancy etc) to spread out over a lower base, thereby
putting a downward pressure on the margins. For the full year,
we expect the margins to decline ~50 basis points in 2013.
McDonald's expects the cost of raw materials to rise at a modest
1.5-2.0% for the full year. Therefore, if the company can somehow
manage to generate the incremental sales, the fastfood giant should
see its margins rebounding to the previous levels.
Franchised margins fell 40 basis points to 83.0%, primarily due
to a combination of weak sales and yen devaluation. McDonald's has
about a tenth of its franchised stores in Japan and a weaker
yen translates back to fewer dollars. The yen has depreciated
almost 25% ever since the country's new PM Shinzo Abe stepped into
the office in December last year. Beginning from the first quarter
of 2014, the year-over-year impact of yen devaluation should get
Franchising is a low revenue, high margin business since the
company derives only a fraction of the franchisee sales and does
not incur operational expenses such as labor, occupancy or cost of
Restaurant Addition Continues
More than 80% of McDonald's worldwide restaurants are
franchised. McDonald's is spending $3 billion in 2013 to add
1,200 net store (1,500 total store additions and about 300
closures) and reimage 1,600 restaurants globally. In the first nine
months of the year, the company has so far added only 443 stores to
take its total store count to 34,923. Therefore, we can expect a
significant number of openings in the fourth quarter.
McDonald's is looking to bolster its presence in China, India,
Russia and East Europe where the restaurant chain is still under
penetrated and has an opportunity to grow.
See full analysis for McDonald's Corporation
a Company's Products Impact its Stock Price at Trefis