McDonald’s is Hurting From These Negative Earnings Drivers

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Currency fluctuations and slow growth in same-store sales pushed McDonald’s (NYSE:MCD) third-quarter earnings down 3.5 percent, missing Wall Street’s expectations. Following the earnings announcement, shares of the world’s largest hamburger chain fell almost 4 percent.

Earnings Drivers

While the company is known for its success in both good economic times and bad, CEO Don Thompson said Friday that global economic pressures and intensifying competition have affected the chain’s business.

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According to a Thomson Reuters estimate, analysts had expected the company to report earnings of $1.47 a share on revenue of $7.16 billion. However, third-quarter revenue decreased from $7.17 billion in the same quarter last year to $7.15 billion. Net income also fell over the quarter, dropping to $1.46 billion, or $1.43 per share, from $1.51 billion, or $1.45 per share.

The company explained that the stronger dollar hurt net income by 8 cents per share.

For McDonald’s, which conducts two-thirds of its business internationally, foreign currency pressures affected growth. The austerity measures in Europe contributed to slower same-store sales growth in recent months. CNBC reported Friday morning that the company and other fast food chains have been “pressured by the European recession and a generally more difficult environment as discount pricing benefits begin to wear off.”

Competition also played a role in McDonald’s disappointing quarterly results. Companies like Jack in the Box, (NASDAQ:JACK) Burger King (NYSE:BKC), and Sonic (NASDAQ:SONC) have all tried to copy the company’s past success. Seeking Alpha noted that “with the industry trying to emulate to a degree the McDonald’s growth roadmap of upgraded restaurants and premium menu items, it’s no small wonder sector names are playing follow the leader in trading at the moment.” Both Wendy’s (NASDAQ:WEN) and Burger King have been successful at winning back customers with their renovated restaurants and new menus. That strategy, said Forbes, is drawing customers away.

However, Chipotle Mexican Grill (NYSE:CMG) also faced slower growth this quarter. Its third quarter earnings showed that while revenue and net income grew, sales growth slowed from last year. On Thursday, Reuters reported that “diners have been spending cautiously, buying fewer drinks and cutting back on big to-go orders.” The company’s Chief Financial Officer, Jack Hartung, said that customers spent less during each visit and placed fewer orders online.

Chipotle’s woes mirror those of McDonald’s to some degree. Thompson said that revenue in stores open at least 13 months, a key restaurant metric, has been negative so far in October. In McDonald’s earnings statement, Thompson warned that conditions ahead would be uncertain. “As we begin [the] fourth quarter, October’s global comparable sales are currently trending negative,” he said.

Don’t Miss: Chipotle: Here’s Why the Stock is Tanking Post Earnings.

MoneyMcDonald’s Earnings Recap

Results: Net income for the McDonald’s Corporation fell to $1.46 billion ($1.43 per share) vs. $1.51 billion ($1.45 per share) a year earlier. This is a decline of 3.1% from the year-earlier quarter.

Revenue: Fell 0.2% to $7.15 billion from the year-earlier quarter.

Actual vs. Wall St. Expectations: McDonald’s Corporation beat the mean analyst estimate of $1.38 per share. It beat the average revenue estimate of $6.94 billion.

(Company fundamentals provided by Xignite Financials. Earnings estimates provided by Zacks)

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