By now even the freshman investors charting Wall Street for the first time have heard about the ‘disappointment’ that McDonald’s Corporation (NYSE:MCD) second quarter results have caused. It is true the numbers do look modest and short of expectations.
But, when analyzing a company that runs over 34,000 restaurants in 120+ countries and feeds 69 million people every day, there cannot be hasty conclusions. So, let us examine the odds, take a re-look at the numbers, and finally figure if McDonald’s Corporation (NYSE:MCD) dividends are at risk.
The biggest challenge that McDonald’s Corporation (NYSE:MCD) is facing comes from the uncertain economic conditions in most parts of the world. The company in its recent earnings call has stated that out of its 11 big markets, 7 are contracting and competitive pressures are mounting.
Challenges at home
The going is tough in the U.S., where McDonald’s Corporation (NYSE:MCD) has over 14,000 restaurants. Total food service sales were off 1.2% in June, the biggest drop since February 2008. According to Crest data, the informal eating out industry, which is mostly comprises quick service restaurants, is expected to be down by 50 basis points, 0.5%, this year.
Pressures are increasing from The Wendy’s Co (NASDAQ:WEN) and Burger King Worldwide Inc (NYSE:BKW). In the second quarter, The Wendy’s Co (NASDAQ:WEN) clocked 0.4% comps growth in North America while Burger King Worldwide Inc (NYSE:BKW) posted a 0.5% decline in this market. Both chains will be more aggressive in the second half as they heavily promote their value menus, add new items, and renovate stores.
The Wendy’s Co (NASDAQ:WEN) has created a lot of positive ripples in the market with its flat bread grilled chicken sandwich that it introduced in April. It has fortified its $0.99 price point-menu offerings and will shortly launch its Pretzel Bacon Cheeseburger, which is being hailed as the chain’s most exciting launch in over a decade. The stock is up over 51% year-to-date.
Meanwhile, Burger King Worldwide Inc (NYSE:BKW) is looming with its new lattes, Rib Sandwich, and Barbecued Chicken Salad. It also did a good job with its Summer Barbeque menu, the $1.29 Whopper Jr, and $0.50 ice cream cones in the second quarter. The company is on a growth path and the optimism shows in the 13% share price increase through the year.
Challenges away from home
Both Europe and Asia Pacific, Middle East and Africa (APMEA) segments are facing uncertain market conditions. In Europe, youth unemployment rates are at 26% and 57% in France and Spain respectively. Germany is reporting negative GDP growth while things remain tight in Portugal and Ireland.
Turning to Asia, the three big markets of China, Japan, and Australia are all down. Recent statistics suggest the growth in China has been slower than expected. The break out of the bird flu epidemic had compounded the trouble, although it is ebbing now.
Now let us take a re-look at McDonald’s Corporation (NYSE:MCD) second quarter results. The company increased its revenue by 2.4% to $7.08 billion, just missing expectations of $7.1 billion. It leveraged this increase to grow its profits by 3.7% to $1.4 billion or $1.38 per share. Analysts had expected $1.40 per share.
Looking at same-store sales, the system-wide 1% growth was ahead of the analysts’ projections of 0.08%. While the U.S. comparable store growth of 1% lagged the 1.5% expected, we need to consider that in addition to tough market conditions, the company was facing huge comparisons from last year when it was promoting its 20-piece Chicken McNuggets. It is noteworthy that McDonald’s Corporation (NYSE:MCD) managed to maintain its last year’s operating income and grew its market share.
Both Europe and APMEA segments grew profits despite a drop in comp sales by 10 basis points and 30 basis points respectively. In Europe operating income was up 5% and in APMEA it was up by 3%.