In second quarter 2013, McDonald’s reported weaker than expected growth in sales and net income which resulted in an earnings per share report that missed analysts’ consensus estimate by $0.02. Management attributed the weaker sales growth in the second quarter to lower U.S. domestic production and softened consumer discretionary spending which has been affecting the company and the restaurant industry throughout 2013.
Second quarter revenue was up 2% from second quarter 2012 to $7.1 billion. Net income for the quarter increased 4% on a comparable quarter basis to $1.4 billion and earnings per share was $1.38. Cumulatively for the year revenue was 2% higher than the first half of 2012 at $13.7 billion and net income was 2% higher at $2.7 billion. Restaurant operating expense margins remained relatively unchanged on a quarterly and six-month basis while operating income increased 2% from second quarter 2012 and 1% on a six-month basis. Further earnings metrics for second quarter 2013 included comparable sales for the six-months ended June 30, 2013, which were down 5.4% from June 30, 2012.
Industry-wide the slowed revenue growth has been prevalent. In the first quarter of 2013 Burger King reported a total revenue decline of 43% from first quarter 2012 with comparable sales growth down 1.4%. Wendy’s also showed slowing total revenue growth in the first quarter of 2013 reporting a top line revenue increase of 1.8% from first quarter 2012.
Cumulatively, growth across all three of McDonald’s core business segments were relatively flat in comparison to 2012. U.S. restaurants, which accounted for 41% of the company’s total restaurants, generated revenue of $2.3 billion for the second quarter, cumulatively finishing the first half of the year at $4.4 billion. These totals represented sales growth of 2% and 1%, respectively. While sales revenue was slightly higher on a quarterly and semi-annual basis operating income fell 0.43% and 1.7%, respectively. The slightly lower operating income was likely an effect of the trend in decreased consumer demand as well as the opening of 100 new U.S. stores since June 30, 2012.
Europe accounted for 21% of the company’s restaurants but totaled 40% of second quarter revenue at $2.8 billion. Second quarter revenue in Europe was up 3%. For the six-month period cumulative revenue was also up 3% to $5.4 billion. Operating income in Europe increased quarterly and for the six-month period adding 5% and 3%, respectively. The increased sales growth in Europe positively reflected the addition of 209 stores in the region since June 30, 2012.
In the Asia Pacific, Middle East and Africa (APMEA) region, quarterly revenues were up 3% from second quarter 2012 at $1.6 billion. Revenues for the first half of the year were also 3% higher than 2012 at $3.2 billion. The increase in revenue was not enough to offset expenses in the region and resulted in a 1% decrease in operating income for the quarter and six-month period in comparison to 2012. Sales in China specifically had a negative effect on the region’s growth due to the avian influenza which has decreased demand.
Overall, regional growth for the company was led by Europe. U.S. growth continued to remain stagnant as consumers softened their spending and APMEA saw declines due to country-specific issues. In the company’s earnings comments it reported a continuation of regional trends expected through the end of the year signifying flat-lining revenue and net income growth projections for 2013.
Following the McDonald’s earnings announcement, the company stock fell 2.68% reflecting the weaker earnings announcement. Given the lower than expected earnings results and weak outlook for the remainder of the year the company’s stock appears to have little upside potential with a one-year price target1 of $105.20. McDonald’s slow growth outlook and the weak demand for restaurant stocks overall makes investment in the broader Dow Jones Industrial Average more attractive in the near term.
1 The price target is derived from Bodie, Kane and Marcus’ intrinsic value formula. The intrinsic value formula discounts the stock’s projected one-year future cash flow by the risk-free rate on the one-year Treasury note and includes adjustments made for specific market assumptions including the stock’s beta and market risk premium.
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I do not hold any positions in the stocks mentioned in this article and do not plan to initiate any new positions.