Why McDonald's Earnings Need to Be Impressive

McDonald's (NYSE: MCD  ) is scheduled to release its quarterly earnings report on Monday, and its stock has climbed to the $100-per-share mark in approaching all-time record-high levels. But disappointing results for McDonald's earnings in past quarters have investors worried that the company might not deliver the fundamental strength it needs to match up to its stock's performance.

McDonald's has been one of the most resilient members of the Dow Jones Industrials (DJINDICES: ^DJI  ) , with notable gains during the bear market year of 2008 that proved its ability to weather recessions with its focus on low price points. But lately, its growth forays have run into some resistance. Let's take an early look at what's been happening with McDonald's over the past quarter, and what we're likely to see in its quarterly report.

Stats on McDonald's

Analyst EPS Estimate

$1.40

Change From Year-Ago EPS

6.1%

Revenue Estimate

$7.10 billion

Change From Year-Ago Revenue

2.6%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Can McDonald's earnings get back on track this quarter?
Once again, analysts have reined in their expectations about McDonald's earnings over the past few months, cutting their estimates for the June quarter by $0.04 per share, and reducing their full-year 2013 consensus figures by twice that amount. The stock has also had trouble pushing higher from current lofty levels, actually falling 2% since mid-April.

McDonald's has faced some big challenges lately, as its first-quarter earnings report in April produced negative same-store sales and disappointing earnings. Not only did operating income drop on a meager 1% gain in total revenue, but the company is seeing a troubling rise in customer complaints that jeopardizes the entire franchise's reputation. This quarter's same-store sales have been a mixed picture, with April's figure falling 0.6%, but May's comps showing a 2.6% rise.

McDonald's is taking aggressive steps to try to answer those challenges. The company expects to spend about $1 billion this year on store renovations that should update its image, and give it an appeal that rival Yum! Brands (NYSE: YUM  ) can't match. McDonald's believes that sales could rise 6% to 7% after renovations are completed, and as the company implements expanded hours and changes to its menu, McDonald's hopes to reverse some of the headwinds it has faced in its U.S. business.

At the same time, McDonald's is seeking growth in promising markets like China, but unlike Yum!'s more concentrated bet on the emerging-market nation, McDonald's is taking a measured approach that doesn't rely on China's success. You'll also find Golden Arches in Vietnam by early 2014, showing the extent to which McDonald's wants to establish a truly worldwide presence.

In McDonald's earnings report, be sure to watch for guidance on how well the company's value menus have performed at producing sales. With 77% of customers using its Dollar Menu, McDonald's has done a good job of beating out rivals Burger King and Wendy's, which weighed in with figures between 55% and 60%, respectively. Even if the global economy stays slow, a value focus could make a big difference in whether McDonald's holds up well and produces impressive growth in the future.

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