McDonald’s Stock Hit by Soft Earnings, Tainted Meat in Japan Stores

July 22, 2014 by Paul Ausick

McDonald'sUpdate: The problems that hit McDonald’s and KFC in China yesterday have reached Starbucks Corp. (NYSE: SBUX) and Burger King Worldwide Inc. (NYSE: BKW) stores in Japan on Tuesday according to a report this morning from the AP. Shanghai Husi Food Co. Ltd., a Chinese company owned by Illinois-based OSI Group Inc., used stale meat and mislabled expiration dates on some supplies to Chinese restaurants, and now McDonald’s says that about 20% of its chicken supplies in Japan were also provided by OSI. Both Starbucks and Burger King had also received meat from OSI and both companies say they have stopped selling sandwiches and burgers made with the meat.

McDonald’s Corp. (NYSE: MCD) reported second-quarter 2014 results before markets opened Tuesday. The fast-food restaurant chain posted diluted earnings per share (EPS) of $1.40 on revenues of $7.18 billion. In the same period a year ago, the company reported EPS of $1.38 on revenues of $7.08 billion. Second-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $1.44 and $7.29 billion in revenues.

The consensus EPS estimate dropped by $0.02 since McDonald’s reported first-quarter results, and the revenue estimate came down by $40 million. The company did not manage to hit even the lower targets, indicating just how weak the business is, especially in the United States, where same-store sales for the quarter dropped 1.5% after dropping by 1.7% in the prior quarter.

The drop in year-over-year earnings was attributed to a tax benefit in 2013 that was not available this year. Investors seem to be taking this into account as the stock price rose moderately in premarket trading Tuesday.

Globally, same-store sales in the quarter were “relatively flat,” and consolidated operating income was also flat (but down 1% on a constant currency basis). Same-store sales declined 1% in Europe and increased 1.1% in Asia. The increase in Asia was attributed to stronger sales in China, and that bit of good news has probably gone out the window following Monday’s revelations of a tainted meat scandal in China.

And in case you were wondering how CEO Don Thompson expects to turn the company around, here is the plan:

Heading into 2014, we acknowledged that we did not expect any material changes to the operating environment this year. As such, full year 2014 global comparable sales are expected to be relatively similar to year-to-date June performance, with July global comparable sales expected to be negative. While near-term results are expected to remain muted, sizable growth opportunities remain, and we are committed to pursuing these opportunities through continuous improvement in everything we do – from the food we serve, to our engagement with our customers, to the management of our financial resources.

In other words, no growth this year and we don’t know what we’ll do in the future to restore growth, but we’ll try anything. Of course the company’s announced plan to return $18 billion to $20 billion to shareholders through a combination of dividends and buybacks between now and 2016 forgives the company’s many sins and nearly complete lack of imagination.

The consensus estimates for the third quarter call for EPS of $1.61 on revenues of $7.6 billion. The current full-year 2014 forecast calls for EPS of $5.75 on revenues of $28.92 billion. None of those numbers will last another week.

McDonald’s shares are down about 1.1% in early trading this morning at $96.76 in a 52-week range of $92.22 to $103.78. Thomson Reuters had a consensus analyst price target of around $106.70 before today’s report. Don’t expect that number to stay there very long either.

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