McDonald's - As Comparable Sales Approach Zero, Pressure Is Building

| About: McDonald's Corporation (MCD)

McDonald's (NYSE:MCD) opened its books for the full year of 2013. Comparable sales in the final quarter of 2013 and start of 2014 remain under pressure, and therefore represent McDonald's with the biggest challenge ahead.

While comparables should get easier, thanks to the Winter Olympics and World Championship later this year, investors are dying to see higher growth on the back of successful menu offerings, to end the current status quo.

Fourth Quarter Key Numbers

McDonald's reported 2.0% revenue growth for the fourth quarter, with revenues totaling $7.09 billion. Comparable store sales slowed down to just 0.1% as negative traffic growth continues. Analysts were looking for revenues of $7.11 billion.

Net earnings were essentially unchanged at $1.40 billion, although they technically rose by 0.1%. As a result of share repurchases, earnings per share inched up by two cents to $1.40 per share. This was a penny ahead of consensus estimates.

Fourth Quarter Highlights

The weakest spot during the quarter was the US, reporting a 1.4% decline in comparable store sales. The company introduced the Dollar Menu & More, featuring more limited food and beverage options. The company really focuses on menu choice, customer engagement and excellence to improve results. Yet these efforts did not result in tangible results yet.

European comparable sales rose by 1.0% driven by a solid performance in the UK, Russia and France. Expansion of the breakfast daypart, premium additions and value menu should drive results.

Comparable sales in Asia-Pacific and the Middle-East fell 2.4% due to weakness in Japan and a modest performance in China as well as Australia. Again the firm will focus on execution, menu and offerings to drive growth.

2013 Review

The past year has been challenging for the fast food chain. Revenues inched up by 2% to $28.1 billion. Earnings grew at a similar pace to $5.6 billion while earnings per share growth came in at 4% on the back of share repurchases.

The company struggled as comparable store sales growth essentially came to a standstill. Actually it rose by a miniscule 0.2% compared to the year ago as higher prices offset lower traffic.

Cautious Optimism For 2014

CEO Don Thompson recognized the struggles of the past year, but notes that the company begins with a renewed focus on global growth properties. The company focuses on innovation, consumer insights and execution to optimize the menu. This should boost the customer experience and accessibility of the brand.

To grow the business, McDonald's could spend as much as $3 billion to drive 1,500-1,600 new restaurant openings, while re-imagining another 1,000 locations across the globe. The company remains committed to return all free cash flow to shareholders, aiming to spend some $5 billion combined on repurchases and dividends in the coming year.

Comparable sales for January are expected to be flat, causing continued near-term challenges. Of course, the Olympics in Russia are bound to start in the coming weeks with the World Championship in Brazil being planned for the summer. These large sport events can obviously make it easier for the company to show comparable growth.

Growth Remains Troublesome

As indicated by the firm, challenges remain in January. Recent efforts under Thomson's helmet to tweak menus and change management have not paid off. The company aimed to introduce higher end products like Angus burgers and Mighty wings next to its value menus, its consumers are not trading up. The fact of the matter is that consumer might even get confused as the company still has not found the right new products, while it has complicated its offerings.

Blue-cash workers are strapped for cash and stick to value meals, while white-collar workers seem to run to fancier, greener, healthier or more sustainable fast-food chains like Chipotle Mexican Grill (NYSE:CMG), or Panera Bread (NASDAQ:PNRA).


Earlier this month, I checked out the prospects for McDonald's and the possible implications of a minimum wage hike on the firm.

I must say I am kind of surprised to see no negative reaction in this market, despite the weak numbers. The valuation has some foundations, trading at a fair 17 times earnings multiple and paying out a solid 3.4% dividend yield. Even while growth is limited, the high payout ratio makes shares appealing and continues to drive investors towards the stock.

Yet there are some key risks. This includes the lack of top line revenue growth, which could perhaps already turn negative at the moment. This is a very dangerous cocktail, especially with inflationary pressures on for example wages.

As such all eyes will be on the comparables, especially with the big sport events coming up. The pressure in on Thompson who has no viable menu changes in place yet after the failure of the Mighty wings. It will be status quo to slightly downhill from here, until comparable growth rates show a pick up.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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