McDonald’s Corporation (MCD), the world’s largest hamburger chain, posted fourth quarter 2010 earnings of $1.16 per share, in line with the Zacks Consensus Estimate. Fourth quarter earnings increased 5% from $1.11 per share reported in the prior-year quarter. However, excluding the unfavorable currency impact of 2 cents in the reported quarter, earnings grew 6.0% year over year.
The earnings growth was driven by value offerings and premium products along with a rise in comparable-store sales across all regions.The company also benefited from its renovation strategy and new menu offerings, which drove higher traffic in the reported quarter.
The company’s full-year earnings per share were $4.58 versus $4.11 in full fiscal 2009.
Quarter Highlights
McDonald’s said that revenues for the quarter climbed 4% to $6.21 billion, outperforming the Zacks Consensus Estimate of $6.19 billion. Excluding the negative impact of foreign currency translation, revenues grew 5.0% year over year.
Revenues from company-operated restaurants rose 3% to $4.2 billion while revenues from franchise-operated restaurants jumped 5% to $2.0 billion. Total operating income grew 2% to $1.9 billion.
McDonald’s global comparable sales continue to grow, while maintaining healthy margins on an expanding market share. Global comparable-store sales rose 5.0% during the quarter with the U.S. sales up 4.4%, Europe up 3.4% and Asia/Pacific, Middle East and Africa (APMEA) up 5.5%.
Product innovation, along with value menu offerings and a variety featuring Chicken McNuggets and McRib have perked up U.S. comps and operating income, despite bad weather in the last month.
In Europe, operating income grew 2% (9% in constant currency), despite severe snowfall, particularly in Germany and U.K during December. Stronger performance in Europe came from France and Russia. The signature menu at a reasonable price, longer operating hours and the restaurant reimaging program continued to drive market share gains.
In APMEA, operating income jumped 18% (10% in constant currency), driven by higher consumer demand resulting from menu innovation, value offering and promotional activities. The upside was also led by strong performance at Japan, Australia and China.
Company-operated expense and franchised restaurant occupancy expenses saw a sharp 300 basis points year-over-year rise and selling, general and administrative expenses scaled up 200 bps from the prior-year quarter.
Fiscal Year Performance
McDonald’s revenues for 2010 jumped 6% year over year to $24.0 billion. Revenues from company-operated restaurants rose 5% to $16.2 billion while revenues from franchise-operated restaurants jumped 8% to $7.8 billion. Total operating income margin expanded 90 bps to 31.0%.
McDonald’s global comparable sales rose 5.0% during fiscal 2010 with positive comparable sales across all geographical segments.
Financial Position
During the quarter, McDonald’s returned shareholders $5.1 billion through share repurchases and dividend payments.
The company anticipates capital expenditure of approximately $2.5 billion for 2011. Nearly half the amount will be reinvested in existing restaurants and the rest will primarily be used to open about 1,100 restaurants.
Outlook
The company expects the positive trend to continue in 2011, and January global comparable sales to consequently increase in the range of 4% to 5%.
Our Take
McDonald’s continues to grow same-store sales while maintaining healthy margins. We believe, over the next few quarters, revenues will grow through unit expansion and strong comps momentum.
Based on a strong balance sheet and consistent earnings, the stock provides relative safety and moderate growth prospects due to its exposure to faster-growing international markets. Moreover, the franchising strategy that is predominant in McDonald’s business model helps drive steady cash flow streams, solid margins and returns.
However, stiff competition from other quick-service restaurant operators and macroeconomic factors influencing consumer spending patterns still remain areas of concern.
Consequently, we have a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.
One of McDonald’s primary competitors, Yum! Brands Inc. (YUM), will announce its fourth quarter results on February 2, after the market closes.
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