McDonald’s Corporation (NYSE:MCD) announced its Q2 earnings on July 23. A weak Euro negatively impacted the fast food chain’s total revenues which stood flat at $6.9 billion. Net income dropped 4.5% to $1.35 billion or an EPS of $1.32. Revenues from Europe, which constitutes the biggest segment for the fast food chain, declined 3% to $2.74 billion. However, on a constant currency basis, Europe revenues were up 7%. The stock has declined more than 10% since the start of the year as weak comparable sales data combined with a large exposure to Europe has resulted in skepticism over the company’s profit generating ability. 
Short-Term Profitability Might Get Hurt
The fast food chain’s margins were impacted by a 5% increase in selling, general and administrative (SG&A) costs primarily due to higher employee costs and technology related costs. We expect SG&A to remain firm in the third quarter as well as McDonald’s is one of the official sponsors for the Olympics 2012. Moreover, McDonald’s expects the cost of commodities to rise by 3.5%-4.5% in the U.S. and 2.5%-3.5% in Europe for 2012. So, the margins will remain tight for 2012 but they should stabilize beyond that.
We are in the process of revising our $98 price estimate for McDonald’s to incorporate its Q2 earnings.
Moderate Comparable Restaurant Sales Growth
McDonald’s comparable restaurant sales for the second quarter stood at 3.7% compared to 7.3% in the first quarter. However, there are positives to take away from the quarter’s performance as the comparable sales growth in June accelerated to 4.4% from 3.3% in April and May, respectively. Restaurant sales in June were helped by the launch of Cherry Berry Chillers and Banana Nut Oatmeal. McDonald’s plans to boost its restaurant sales in coming months with the launch of ‘Under 400 calories’ menu in the U.S. For the long term, we expect the comparable sales growth to be around 3.5%-4% annually. Notes:
- MCD 8-k [↩]
- 2nd UPDATE: McDonald’s 2nd-Quarter Net Falls 4.5% as Economy Pressures Margin, July 23, 2012, wsj.com [↩]