Fast-food goliath McDonald's (MCD) announced slightly better-than-expected fourth quarter results Wednesday morning. Revenue grew 2% year-over-year to $7 billion, a touch better than consensus expectations. Earnings, which have seen estimates slashed during the past several months, were a few pennies better than anticipated, growing 4% year-over-year to $1.38 per share.
We're not too fixated on the "beat," but rather the weakness we are seeing at the core business. Global same-store sales increased just 0.1% during the quarter - McDonald's worst in years. Same-store sales in the US jumped 0.3% year-over-year in the fourth quarter with flat operating income - the top-line was better than the rest of the company, but certainly is not a strong figure. McDonald's continues to focus on value offerings and has some new products coming, including the recently released Mighty Wings, the Fish McBites, and the grilled cheddar onion burger.
Unfortunately, we think McDonald's focus on value is hurting its other products and making consumers less likely to purchase higher-ticket items. While conditioning consumers to pay less for food, the company has also squeezed its own margins, as well as those of its operators, which we think could have a negative impact on the long-term operations. CEO Don Thompson certainly has his work cut out for him with the domestic business. Increased competition in the value market from competitors such as Wendy's (WEN) only makes growing the US business more difficult.
In Europe, same-store sales declined 0.6%, but operating income grew 7%, excluding currency. Obviously the European economy is softer than the US, so we're actually pleased with how well sales have held up. If negative guest counts can be reversed, we could see a decent year for McDonald's in Europe. Operating margins for the year only fell 10 basis points to 19.1%. Margins still significantly trail the US business, and this trend could continue if the firm sees its commodity basket price rise 3%-4% as it expects.
Performance in Asia-Pacific, Middle East and Africa (APMEA) was weak during the fourth quarter, with same-store sales tumbling 1.7% year-over-year and operating income falling 1%, excluding currency. The segment continues to be dwarfed by the larger US and European segments, but China could eventually become a real profit center. However, we've yet to see the firm achieve substantial scale to boost operating margins, and performance in the broader Chinese fast-food sector has been mediocre as of late. If McDonald's hopes to hit its annual operating income growth of 6-7% with sales growth of 2-3%, it will need to experience better results in China, and Asia as a whole.
Overall, we thought McDonald's fourth-quarter performance was mediocre. While some positive product launches could help reinvigorate the brand in the US heading into 2013, the days of massive product innovations (like McCafe under previous CEO Jim Skinner) look a long ways in the future. We wouldn't go as far as to blame Thompson. Skinner may simply have left when the product pipeline was empty. We also do not believe the days of its product innovation are over, but it's clear the company has hit a bit of a rough patch in terms of innovation. We're still waiting patiently to open up a position in the company in our Dividend Growth portfolio.