McDonald's Earnings: 3 Important Takeaways

The further we get into third-quarter earnings season, the worse things look for the Dow Jones Industrial Average (INDEX: ^DJI  ) . After the global fast-food chain McDonald's (NYSE: MCD  ) reported earnings this morning, the blue-chip index plummeted and is down 166 points, or 1.23%, as of 12:15 p.m. EDT.

Digging into McDonald's earnings
As McDonald's earnings release noted, its third-quarter metrics show evidence of "challenging [economic] conditions." While the fast-food giant beat estimates for revenue, it missed on both accounts relative to its performance in the same quarter last year. Its shares are accordingly down considerably on the news.

Metric

Result

Consensus Estimate*

Last Year

Revenue (billions)

$7.15

$7.14

$7.17

Earnings per share

$1.43

$1.47

$1.45

Source: The Wall Street Journal. *Based on analysts polled by Thomson Reuters.

In no particular order, here are the three most important takeaways from McDonald's earnings release.

1. Falling profits
The most obvious takeaway is that the company's profit is under pressure. Much of this can be traced to its ongoing approach to pricing. Over the last few years, McDonald's has implemented a two-pronged strategy, offering inexpensive value items while also ramping up higher-dollar products like the Angus burger, among others.

While the purpose of the former is to drive traffic and gain market share during these tough economic times, it's also pressuring margins. Not to mention, it has led to similar approaches at competitors like Burger King (NYSE: BKW  ) and Wendy's, both of which are fighting for the same customers.

2. Same-store sales
Same-store sales, or comps, are one of the most widely watched statistics in the retail and restaurant industry. For the quarter, McDonald's reported comps of 1.2% in the United States, 1.8% in Europe, and 1.4% in its region encompassing Asia, the Middle East, and Africa. Although these increases are relatively small, they were gains nonetheless. More concerning was news that October sales are currently trending negative. To put this in perspective, according to The Wall Street Journal, McDonald's hasn't seen negative comps like this for more than a decade.

Despite this, the hamburger chain's chief executive officer, Don Thompson, said: "We have the right plans in place to drive long-term profitable growth along with the experience and alignment throughout the McDonald's System to navigate the current environment. We expect near-term top- and bottom-line growth to remain pressured as we focus on driving guest traffic and market share by leveraging our strategies and competitive advantages in response to the global economic, operating and competitive challenges"

3. Currency pressures
Finally, McDonald's is yet another company to acknowledge the challenges associated with the increased uncertainty and volatility in the currency market. Earlier this quarter, similar comments have been made by Intel (Nasdaq: INTC  ) , Johnson & Johnson (NYSE: JNJ  ) , IBM (NYSE: IBM  ) , and Coca-Cola (NYSE: KO  ) , among others. For instance, negative currency effects impacted McDonald's top and bottom lines by 4% each.

Foolish bottom line
The fact that McDonald's is struggling in the current economic environment is certainly a troubling sign. For shareholders in the company, however, the good news was that it increased the quarterly dividend by 10% to $0.77 per share. For a list of other great dividend stocks, check out our free report: "The 3 Dow Stocks Dividend Investors Need." To access a copy instantly, simply click here now.

John Maxfield has no positions in the stocks mentioned above. The Motley Fool owns shares of International Business Machines, Intel, Johnson & Johnson, and McDonald's. Motley Fool newsletter services recommend Burger King Worldwide, International Business Machines, International Business Machines, Intel, Johnson & Johnson, The Coca-Cola Company, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 20, 2012, at 1:27 PM, lowmaple wrote:

    currency problems are short term and a financially sound company will be able deal with them. Long tem investing advised.

  • Report this Comment On October 20, 2012, at 10:00 PM, NickD wrote:

    McDonald's or Yum Brands will be huge in China either way go 50-50 and you make a boat load in the next coming century

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