McDonald’s Corporation (MCD) shares fell 4.5 percent yesterday as the fast food giant reported weak third quarter earnings—its worst in nine years. Total third quarter revenues were $7.15 billion, unchanged from last year, however given constant currencies revenues they would have increased 4 percent year-on-year. Revenues were on par with analysts’ forecasts of $7.14 billion.
However the company reported operating income declined 4 percent to $2.29 billion—unchanged in constant currencies. Due to heavy industry competition, operating margins dropped 140 basis points to end at just 32 percent.
“While our sales momentum and current financial results reflect today’s challenging conditions, we continue to see significant long-term opportunities for brand McDonald’s and remain confident in the underlying strength of our business model,” said McDonald’s Chief Executive Officer Don Thompson in a press release.
“We have the right plans in place to drive long-term profitable growth along with the experience and alignment throughout the McDonald’s System to navigate the current environment. We expect near-term top- and bottom-line growth to remain pressured as we focus on driving guest traffic and market share by leveraging our strategies and competitive advantages in response to the global economic, operating and competitive challenges. As we begin fourth quarter, October’s global comparable sales are currently trending negative.”
McDonald’s quarterly report highlighted some bright spots, as well. For example, the company’s global comparable sales increased 1.9 percent—although slower than previous quarters—and it returned $1.3 billion to shareholders through share repurchases and dividends. The net income fell, however, by 3 percent, and share repurchases caused individual share earnings to fall by a percentage point to $1.43 per diluted share.
Although operating earnings at its U.S. division fell by 1 percent for the year, McDonald’s European division performed comparatively well. Growth in Europe was 1.8 percent and the company actually gained market share. Although operating income dropped by 7 percent based on currency value, given constant currency it actually increased 3 percent. Weakness in Germany was offset by particular strength in Russia, the United Kingdom (think Olympics) and France.
McDonald’s also enjoyed a successful quarter in its Asia/Pacific, Middle East and African division, which posted an increase of 1.4 percent in comparable sales. Not only did operating income jump 3 percent, but given constant currency it would have been a full 4 percent rise.
McDonald’s is facing tough competition from brands such as Burger King, Wendy’s and Taco Bell, which have all introduced new, innovating products to directly compete with McDonald’s. But no need to worry about losing access to your favorite Big Mac or Happy Meal distributor. Even given its weak earnings, McDonald’s revenues for the first three quarters of 2012 totaled $20.6 billion, with a net income of $4.1 billion. At that rate, its net income for the full year could easily be about $.5.5 billion. Although its shares have fallen by about $12 this year, they started at $102 a share. Likewise, over the past five years, McDonald’s saw its shared increase by about 55 percent.
“The McDonald’s System remains focused on building the business for the long-term by meeting the evolving needs of our customers” Thompson said. “We continue to execute against our global priorities of optimizing our menu, modernizing the customer experience and broadening accessibility under the Plan to Win while implementing near-term tactical shifts to build momentum, enhance the relevance of our brand and deliver increased value to the McDonald’s System and our shareholders.”
