Can McDonald's Hold Off Yum! Brands and Burger King?

McDonald's (NYSE: MCD  ) will release its quarterly report on Monday, and investors are impatient about the company's recent stock slump. Although analysts expect McDonald's earnings to rise, recent moves from Yum! Brands (NYSE: YUM  ) and Burger King (NYSE: BKW  ) show just how competitive the fast-food industry has become.

McDonald's has obviously answered such tests before, with a long history of leadership in the fast-food industry. Yet, poor traffic in the once fast-growing Chinese market has led to difficulties for McDonald's; the one saving grace is that Yum! has seen even worse damage in the emerging market. But a return of growth from Taco Bell in the U.S., and a resurgent Burger King, could cause problems closer to home for McDonald's. 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 report.

Stats on McDonald's

Analyst EPS Estimate

$1.51

Change From Year-Ago EPS

5.6%

Revenue Estimate

$7.34 billion

Change From Year-Ago Revenue

2.6%

Earnings Beats in Past 4 Quarters

1

Source: Yahoo! Finance.

Will McDonald's earnings look better this quarter?
Negative views about McDonald's earnings have continued among analysts in recent months, as estimates for the third quarter have fallen by $0.04 per share, and full-year 2013 projections have suffered more than double those declines. The stock has also languished, falling 5% since mid-July.

McDonald's opened the quarter on a poor note, with just 1% growth in same-store sales, and declines in comps in Europe, Asia, Middle East, and Africa. Even though the company managed to boost overall revenue by 2.4% and earnings rose, McDonald's fell short of expectations. And there was more bad news: The company said the rest of the year could continue to pressure its results.

Even worse, competition has started to ramp up from already high levels. In an effort to bolster sales, McDonald's fast-food rivals have come out with new menu items designed to capture customers. Burger King's Satisfries promise a healthier alternative to traditional French fries, while its French Fry Burger aims at its value customers with its $1 price tag. Meanwhile, Yum! has aimed new offerings at the early crowd, with its waffle taco as well as yogurt parfaits, oatmeal, and breakfast burritos.

But McDonald's has responded with menu revamps of its own. Last month, the company launched its Mighty Wings nationwide rollout, going head-to-head against Yum!'s Pizza Hut and KFC franchises. Moreover, its Steak, Egg & Cheese McMuffin should help hold back Yum!'s planned Taco Bell breakfast offerings. Possible expansions of its dollar menu and promotional items could further fuel McDonald's sales.

In addition, the company has taken steps to update its business in several ways. McDonald's has started to modernize its decor in an effort to appeal to customers who've grown used to competitors Chipotle (NYSE: CMG  ) and Panera (NASDAQ: PNRA  ) , and their more upscale appearance. Moreover, it's testing a smartphone app to allow preorders, potentially shortening wait times, and matching what Chipotle and Five Guys have offered for a long time.

In the McDonald's earnings report, watch to see whether the company finally starts to see improvement in China. Initiatives aimed at the U.S. market are important, but the return of growth from emerging markets is essential to McDonald's long-term strategic plan.

Can McDonald's beat out Yum! for world domination?
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  • Report this Comment On October 17, 2013, at 11:01 PM, WallaceNDavis wrote:

    And how exactly is Burger King "resurgent" given its tiny 0.6% same-store sales increase in Q2? It is retreating from its menu strategy with its tail between its legs. This essay is nonsense.

  • Report this Comment On October 18, 2013, at 11:47 AM, TMFGalagan wrote:

    Burger King's 30% rise in share price over the past year is resurgent compared to its lukewarm reception after its IPO in mid-2012. The stock has greatly outperformed McDonald's flat performance and Yum!'s drop over the same period.

    best,

    dan (TMF Galagan)

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