McDonald's showing signs of tear from economy

| 07 Aug 2012 | 03:48

By Candice Choi NEW YORK — Not even McDonald's Corp. has an iron stomach when it comes to the global economic downturn.

The world's largest hamburger chain has thrived in boom and bust times by selling cheap eats and constantly updating its menu with popular items such as fruit smoothies and snack wraps. But the company is starting to show signs of tear from global economic pressures, intensifying competition and penny-pinching customers who are eating out less often in some hard-hit regions around the world.

The Oak Brook, Ill.-based company said on July 23 that its net income fell 4 percent in the second quarter as a strong dollar took a hit on results. Like other U.S. companies, McDonald's is being squeezed by unfavorable currency exchange rates. When the dollar is rising against the other world currencies, companies that do business internationally take a hit when converting local currencies back into the dollar.

McDonald's is also facing higher costs for labor and ingredients, although it said it now expects commodity costs to rise between 3.5 percent and 4.5 percent for the full year, down from the previous forecast of up to 5.5 percent.

Suggesting more challenges ahead, McDonald's said global sales at restaurants open at least a year rose 3.7 percent for the three months ended June 30. The figure, which is a key metric because it strips out the impact of newly opened and closed locations, represents the slowest growth since the company reported sales growth of 2.3 percent in the fourth-quarter of.

“We've been in situations like this before,'' CEO Don Thompson said in a conference call with investors, noting that the company will draw on its past experiences in the past to navigate the current challenges.

Janney analyst Mark Kalinowski nevertheless said the company was able to deliver relatively strong overall growth at a time of economic uncertainty as a result of “best-in-class'' execution. He said he thinks that McDonald's will continue to grab market share. He maintained his “buy'' rating on the shares.

Still, other analysts have noted that McDonald's growth has slowed in recent times, which could reflect stiffer competition from newer chains like Panera Bread Co. and old rivals such as Wendy's Inc. and Burger King Worldwide Inc. stepping up their games.

In the U.S., McDonald's said sales rose 3.6 percent in the quarter, with increased traffic contributing to growth.

In Europe, where McDonald's does 40 percent of its business, the company said customer counts were down in several economically hard-hit regions. But the company said that it's faring better than its competitors and, overall, sales rose 3.8 percent.

In the region that includes Asia Pacific, the Middle East and Africa — where McDonald's is looking to expand its presence — the figure edged up just 0.9 percent as results from Australia and China offset weakness in Japan, where consumers are still reeling from last year's earthquake and tsunami and choosing to eat at home more often.

For the quarter, McDonald's says it earned $1.35 billion, or $1.32 per share. That's down from $1.4 billion, or $1.35 per share, in the year-ago period. McDonald's said unfavorable currency exchange rates hit its results by 7 cents per share.

In the third quarter, the company expects exchange rates to hurt results by 8 to 10 cents per share.

Total revenue for the quarter was $6.92 billion, up slightly from $6.91 billion a year ago. When stripping out the impact of exchange rates, the company said revenue rose 5 percent.

Analysts polled by FactSet on average expected $1.38 per share on revenue of $6.94 billion.

Shares of McDonald's, which has 33,000 locations around the world, were down $2.69, or almost 3 percent, at $88.89.