McDonald’s Corporation (MCD), the world’s largest hamburger chain, posted second quarter 2011 earnings of $1.35 per share, beating the Zacks Consensus Estimate of $1.28.
Reported earnings increased 19% from $1.13 per share reported in the prior-year quarter. However, excluding the favorable currency impact of 10 cents in the reported quarter, earnings grew 11.0% year over year.
The significant upside in earnings was driven by higher comparable store sales across all regions arising from higher traffic.The company also continues to benefit from its “Plan to Win” program, which aims to sustain growth by driving restaurant visits, providing everyday value, innovating new menu items, and re-imaging restaurant and market campaigns.
Quarter Highlights
The leading fast-food chain operator reported revenues of $6.91 billion, up 16% year over year, and exceeded the Zacks Consensus Estimate of $6.65 billion. Excluding the positive impact of foreign currency translation, revenues grew 8.0% year over year.
Revenues from company-operated restaurants rose 17% to $4.70 billion while revenues from franchise-operated restaurants jumped 14% to $2.21 billion. Total operating income grew 19% to $2.19 billion.
McDonald’s global comparable sales continue to grow while maintaining healthy margins on an expanding market share. Global comps rose 5.6% during the quarter attributable to higher sales in the U.S. (up 4.5%), Europe (up 5.9%) and Asia/Pacific, Middle East and Africa (APMEA) (up 5.2%).
Product innovation, along with value menu offerings like Frozen Strawberry Lemonade, Chicken McNuggets, popular Fruit & Maple Oatmeal and McCafe premium beverages bolstered U.S. comps and operating income growth of 6%.
In Europe, comps and operating income growth of 24% was driven by strong performance in France, Russia and U.K. Unique premium menu offerings, including McWraps and 1955 Burger, limited-time food events like U.K.’s Great Tastes of America campaign and the restaurant re-imaging program continued to drive market share gains.
On the other hand, comps and operating income expanded 34% in the APMEA region, attributable to healthy performances in China and various other markets. Continued focus on core value menu offerings, menu innovations, promotional activities and service initiatives as drive-thru and longer operating hours were key growth drivers in the segments.
Company-operated expenses and franchised restaurant occupancy expenses witnessed year-over-year increases of 18% and 12%, respectively. Selling, general and administrative expenses scaled up 4% from the prior-year quarter.
Financial Position
During the quarter, McDonald’s returned $1.4 billion to the shareholders through share repurchases and dividend payments.
Outlook
The company expects the positive trend to continue in 2011 and for the month of July, the global comparable sales growth is expected in the range of 4% to 5%.
Our Take
The company reported better-than-expected results, and we expect estimates to go up in the coming days.
McDonald’s continues to drive same-store sales and traffic despite menu price increase. We believe revenues will grow through unit expansion, strong comps momentum and reimaging program going forward. Based on a strong balance sheet and consistent earnings, the stock provides relative safety and moderate growth prospects given its exposure to faster-growing international markets.
Moreover, the franchising strategy, which is predominant in McDonald’s business model, helps drive steady cash flow streams, margins and returns. However, economic headwind, steeply rising commodity as well as labor costs and intense competition still remain areas of concern.
The Zacks Consensus Estimates for 2011 and 2012 are pegged at $5.12 and $5.16, respectively.
Consequently, McDonald’s holds a Zacks #2 Rank (short-term Buy recommendation). We also reiterate our long-term Neutral recommendation on the stock.
One of McDonald’s primary competitors, Yum! Brands Inc. (YUM) reported second quarter 2011 adjusted earnings of 66 cents, which beat the Zacks Consensus Estimate by a nickel. Earnings increased 13% year over year mainly on the back of strong performance at its China division and other emerging markets as well as a lower tax rate.
