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What to Expect from McDonald’s First Quarter Results

April 20, 2014 | About:

The world’s largest burger giant McDonald’s (NYSE:MCD) is expected to come up with its first quarter earnings in on Tuesday. In 2013 the Big Mac maker faced difficulty due to macro economic conditions. However, the company expects some improvement to come its way in 2014, although there won’t be significant shift in market dynamics.

McDonald’s fourth quarter 2013 results didn’t live up to the expectations of the shareholders with comparable store sales dropping 1.4% in the domestic market.

Number Expectations

The first quarter of 2014 seems to be caught in the same situation as we see January same store sales fall 1.2% globally. Increasing competition from Yum! Brands (NYSE:YUM) is one of the prime reasons that growth is getting restricted and challenged for the fast food giant. According to analyst forecast, the quick service restaurant company is estimated to report a 2.7% fall in net profit to $1.24 billion against last year’s comparable period. This is because commodity prices are estimated to remain high that could increase cost by 1% to 2% in the first half of the year and impact margins in the first quarter.

Sales are also expected to take a toll due to the extreme winter that U.S. saw during the quarter, which automatically restricted people from going outdoors. In addition to this, strengthening dollar would reduce its overall revenue from overseas market. Moreover, weakness Europe and Asia could also have an impact on its revenue. The Dollar menu is expected to be a savior that could help the company increase restaurant traffic.

The fast food industry is facing challenge as the global economy seems to slow down a bit. The U.S. market is getting extremely competitive as fast food chains are fighting it out to boost their footfall. Same store sales have not seen any great upward movement in the recent past, in fact they continue to decline.

The Oak Brook company plans to open 1,500 to 1,600 outlets across the globe in the current year which could consume resources to the extent of more than half of $2.9 billion to $3 billion which is allotted for capital expenditure.

Maximizing Shareholders Return

The prime purpose of any business is to increase shareholders value. Last year McDonald’s returned $4.9 billion to its shareholders in terms of share repurchase and dividends. For 2014, the company plans to reward its shareholders with nearly $5 billion. Not just this, the company is working hard to fight the challenges and maintain future growth and profitability for its hareholders.

Efforts Put In

For 2014 McDonald’s has tried to give a balanced combination of core products, value meal and sizzling new offering to entice customers. Although the American food major is keeping restaurant costs under control, expenses are expected to be on the higher side which could suppress operating margins.

Meanwhile competition is intensifying as fellow players such as Yum! Brands and Starbucks (NASDAQ:SBUX) are adding breakfast option to their menu to grab a share of the breakfast market. To counter this attack, McDonald’s started offering free coffee this month. These players have already eaten up a lot of McDonald’s share in the past and are weighing on the company’s revenue.

Last Word

Mcdonald’s and other fast food giants are facing increased challenge as more and more people are becoming health conscious. It important for the company to come out with healthier options to keep its long term growth prospects intact.

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GuruFocus has detected 5 Warning Signs with McDonald's Corp $MCD.
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