Analysts Weigh In: McDonald's Weak Earnings Report, Challenging Remainder of 2013 (MCD)

McDonald's MCD reported a weak second quarter before the opening bell on Monday. The company was also downbeat on the remainder of the year and shares fell.

Second Quarter Highlights

For the second quarter ended June 30, McDonald's reported earnings per share of $1.38 vs. the $1.40 expected by analysts, a miss of 1.43 percent. Earnings per share rose 4.5 percent from the same period a year ago when the company reported EPS of $1.32.

"McDonald's results for the quarter reflect our efforts to strengthen our business momentum for the long-term," said McDonald's President and Chief Executive Officer Don Thompson. "We remain strategically focused on the global growth priorities that help us better serve our customers. While the informal eating out market remains challenging and economic uncertainty is pressuring consumer spending, we're continuing to differentiate the McDonald's experience by uniting consumer insights, innovation and execution."

Revenue was also slightly weaker than forecast in the quarter as revenue was reported at $7.08 billion, below the consensus analyst forecast of $7.1 billion by 0.28 percent. Revenues rose 2.3 percent from the second quarter of 2012 when the company reported revenue of $2.3 percent.

Regional Breakdown

McDonald's reported that global comparable store sales rose 1.0 percent in the quarter. On a regional basis, comparable store sales by region were as follows:

• U.S. sales rose 1.0 percent.


• European sales fell 0.1 percent due to weakness in Germany and France which was off-set by strength in the U.K. and Russia.


• Asia/Pacific, Middle East and Africa (APMEA) sales fell 0.3 percent in the quarter due to weakness in China, Australia, and Japan.

CEO Thompson concluded, "While our consolidated results this quarter were positive, global comparable sales for July are expected to be relatively flat. Based on recent sales trends, our results for the remainder of the year are expected to remain challenged. 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."

Weak Outlook

As Thompson noted, the firm expects global comparable sales to be flat in July, a weak reading. He also expects full year comparable sales to be challenged, another sign that the rest of 2013 may not be so super-sized for the company.

Analysts Disappointed

Analyst weighed in following the release and the general consensus was that the report was disappointing. Bank of America Merrill Lynch wrote, "The primary disappointment was in the U.S. which ended the quarter soft with same store sales for the month of June down 0.2% which put 2Q U.S. comps up 1% versus up 3.6%."

However, they reiterated buy and a $110 price objective after the weak earnings. "We think McDonald's shares can sustain a premium valuation given strong dividend support, a relatively defensive business model, and a strong global competitive position. Our $110 price objective reflects a multiple of about 19x our 2013 EPS estimate, a premium to the 5-year average and 10-year average P/E for MCD shares. We are comfortable with that premium because MCD is well-positioned to improve sales going forward."

Morgan Stanley also commented Monday morning and is more cautious with an Equal-weight rating. "2Q EPS were normal EPS miss; the more important commentary about July suggests further global sales softness. Ironically, Europe drove the quarter's profits. While macro plays a significant role in these weak results, investors will also likely question whether weakness is also a function of increasing competitive intrusion."

"Outlook doesn't offer that much encouragement, with flat SSS expected in July (we were ~+3%), with limited pricing power," they concluded.

Sterne Agee is more bullish in the long-run though, as they say the long-term investment thesis remains intact. "Clearly, we are disappointed with SSS in the U.S. in June. Also, commentary around July SSS (flat) underscores the difficulty in the restaurant environment in the U.S. in the last few weeks (casual dining also showing weakness). Our long-term view of MCD remains intact, however, given an improved new product pipeline, superior marketing power, and ~3% dividend yield."

Sterne Agee reiterated a Buy rating and $107.00 price target this morning as they see EPS growing into next year.

Shares Drop

McDonald's shares dropped on the news as markets priced in a weak second half of 2013 for McDonald's. Shares fell 2.82 percent to $97.45, a decline of $2.80 per share.