Challenging Economy Bruises McDonald’s Second-Quarter Earnings

McDonald

McDonald’s (NYSE:MCD) stock got a little beat up after reporting relatively underwhelming second-quarter results before the bell on Monday. Shares fell as much as 2.5 percent in early trading as investors weighed a top- and bottom-line beat against a generally unimpressive economic outlook.

McDonald’s revenue increased 2.43 percent on the year to $7.08 billion, just shy of the average analyst estimate of $7.09 billion. Adjusted earnings increased 4.55 percent on the year to $1.38 per share, missing the average estimate of $1.40 per share. Global comparable store sales increased 1 percent. This sales increase can be contextualized by preliminary data released by the U.S. Census Bureau.

The data show that overall sales at eating and drinking places declined 1.2 percent on the month in June following a 0.6 percent sequential decline in May. However, despite the two-month slide, industry sales in June were up 3.1 percent on the year, and second-quarter sales are up 4.2 percent compared to the same period last year.

“While our consolidated results this quarter were positive, global comparable sales for July are expected to be relatively flat,” said President and CEO Don Thompson in the earnings release.

The flat outlook for July is in line with other indicators of economic health, such as the Thomson Reuters/University of Michigan preliminary index of consumer sentiment, which came in worse than expected. Gallup’s Economic Confidence Index also recently posted low readings after hitting highs in April, suggesting that consumer spending may evaporate somewhat in the dog days of summer.

“Based on recent sales trends, our results for the remainder of the year are expected to remain challenged,” continued Thompson. “Throughout McDonald’s history, we have succeeded in a variety of operating and economic environments. I am confident that our system, global infrastructure and the unique and evolving McDonald’s brand experience will enable us to deliver sustained profitable growth for the long-term.”

Despite the headwinds and some short-term gloom, the overall outlook for the company does look positive. Same-store sales surged 2.6 percent in May, bucking four months of declines. The company has gotten the ball rolling on an aggressive campaign to revitalize both its marketing and menu. The company has as many as 160 new offerings in the pipeline on a worldwide menu of about 140 items.

McDonald’s will fight for consumer attention this summer — as always — against competitors like Yum! Brands (NYSE:YUM), Burger King (NYSE:BKW), and Wendy’s (NYSE:WEN). Alongside a reinvention of its menu, the Golden Arches are making their way to new markets. Recently, the company announced that a restaurant will be opened in Ho Chi Minh City, Vietnam, in early 2014. At the same time, McDonald’s is shuttering locations that have proven to be too costly. For example, up to three locations will be closed in Iceland.

McDonald’s may be sailing turbulent seas alongside the rest of the industry, but recent initiatives have demonstrated that the company is as competent a navigator as ever. And if the growth prospects look weak, McDonald’s still yields an attractive 3.1 percent, the highest of the fast-food chains, and higher than the restaurant industry average of 2.5 percent. McDonald’s most recent five-year dividend growth rate was also good, at 15.3 percent. McDonald’s currently pays out 55 percent of its retained earnings to investors, which suggests that the company has the capacity to increase dividends in the future.

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