McDonald’s Earnings Show More Caution Than Optimism

McDonald's

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McDonald’s (NYSE:MCD) shareholders aren’t loving it, but they aren’t hating it, either. Shares edged slightly lower in early trading on Thursday after the fast food chain reported earnings of $1.40 per share for the fourth quarter, up 1.5 percent on the year and 1 cent higher than the mean analyst estimate. Revenue increased about 2 percent to nearly $7.1 billion, just shy of the mean analyst estimate of $7.11 billion. Operating income and net income were both flat on the year, at $2.2 billion and $1.4 billion, respectively.

Full-year earnings increased 4 percent on the year to $5.55 per share, consistent with the mean analyst estimate. Revenue increased 2 percent to $28.1 billion, a fraction shy of the mean analyst estimate of $28.13 billion. Operating income and net income both increased 2 percent for the year to $8.8 billion and $5.6 billion, respectively.

Although the overall results don’t show any outright weaknesses like contracting earnings or revenue, the data make the company look bland, and there is some regional weakness overseas to worry about. In the earnings release, CEO Don Thompson said that “2013 was a challenging year” but emphasized constantly evolving — and ostensibly effective — strategy. He set capital expenditures at $2.9 billion to $3 billion, which will fund the construction of up to 1,600 new restaurants and the “reimaging” of more than 1,000.

Global comparable sales decreased by 0.1 percent in the fourth quarter but grew 2 percent for the year, with much of the growth in North America and Europe. Comparable sales at McDonald’s franchises in Asia, the Pacific, the Middle East, and Africa contracted by 2.4 percent in the final quarter of the year, and operating income declined by 8 percent (although much of the loss was due to currency effects).

It may be accurate to describe Thompson’s tone in the company’s earnings release as cautiously optimistic, heavy on the caution. ”As we begin 2014, global comparable sales for the month of January are expected to be relatively flat,” he wrote. “While near-term challenges remain, we are intent on strengthening our brand to further differentiate McDonald’s and become an even bigger part of our customers’ lives.”

Some of those near-term headwinds include a beleaguered U.S. consumer, tons of bad mojo surrounding the company’s employee-relations policies, and rising beef costs. And, as the earnings data indicate, overseas sales in the APMEA segment have been hurting, too.

Japan is McDonald’s second largest market, but the fast food chain recently downwardly revised its income expectations to 5 billion yen ($48 million) in the country, reflecting a 57 percent cut from its previous full-year forecast. Analysts had previously expected McDonald’s Japan to report a net income of 9.53 billion yen from the 3,170 stores it operates in the country.

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