McDonald’s (MCD) Q3 Earnings Preview: Steady As She Goes

 @natrudy
on October 18 2013 5:56 AM
McDonalds 2012
A McDonald's restaurant in the United States. Reuters

The world’s largest fast food company, McDonald’s Corporation (NYSE:MCD), is likely to post steady earnings in line with expectations, as it deals better with slow global sales than rivals like KFC owner Yum! Brands, Inc. (NYSE:YUM), which posted dismal China sales last week.

McDonald’s, based in Oak Brook, Ill., will report third-quarter earnings and September sales on Monday morning before the market opens. Profits are estimated to reach $1.5 billion from $1.45 billion last year, with revenues up 2.6 percent to $7.3 billion, according to analysts polled by Thomson Reuters. They expect earnings per share of $1.50, up 5.4 percent from last year.

Competition in the U.S. fast food industry in September and October was intense, wrote Barclays PLC (LON:BARC) analysts in a research note, but McDonald’s September launch of its Mighty Wings chicken menu item likely boosted traffic to the company’s 14,000 U.S. outlets.

Barclays' analysts forecast a slight uptick in global revenues of 1 percent over the year before. Quarterly sales should stay flat or grow 1 percent, led by the U.S. with a 1 percent sales increase, slightly more than Europe (0.8 percent) and Asia-Pacific, the Middle East and Africa (0.2 percent).

Overall, U.S. sales have been disappointing lately, wrote the analysts. McDonald’s has suffered from a sales slump in recent months amid a halting global economic recovery and volatility in emerging markets.

Fast food industry sales overall are probably even with second-quarter trends, according to Citigroup Inc. (NYSE:C) analysts. Burger King Worldwide Inc (NYSE:BKW) is one brand that should slightly outperform its rivals in sales, given a lackluster third quarter for many other brands.

McDonald’s August sales, however, were boosted by a Monopoly promotion, helpful amid a climate where fast food sellers are discounting to attract thrifty diners. Similarly, the Mighty Wings launch should help the firm's topline especially after a strong performance in its test markets.

Profit margins at McDonald’s across all major regions will likely slip down 0.5 to 1.5 percent for the quarter, according to Barclays.

Over the year, McDonald’s planned to open about 1,500 new stores, to complement its existing 34,000 store portfolio, including about 500 in Japan and Latin America, according to the company’s last earnings call.

New stores could see about 3 percent net growth for the third quarter, or about 1000 stores.

Over the quarter, the company has also continued with its “re-imaging” initiative, spending more than $1 billion in capital on renovations as it revamps décor to comfort ever-pickier consumers.

At an industry conference in September, McDonald’s executives said that cell phone ordering, longer opening hours and value menus were being deployed to combat narrowing profit margins, against the backdrop of a serious price war among fast food rivals. 

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