McDonald’s Stumbles on Currency Exchange Rates

A stronger U.S. dollar bit into both the top and bottom lines at McDonald’s Corp. (NYSE: MCD) in this morning’s second-quarter earnings report. The company reported earnings per share (EPS) of $1.32 on revenue of $6.92 billion versus expectations for EPS of $1.38 on revenue of $6.94 billion. The negative impact of foreign currency translation cost McDonald’s $0.07 per share for the quarter.

Excluding a negative 5% impact on revenue due to currency translation, McDonald’s revenue would have been $7.25 billion. The company’s new CEO, Don Thompson, said:

McDonald’s global comparable sales remained solid for the quarter while overall results reflected the slowing global economy, persistent economic headwinds and the investments we’ve made to enhance restaurant operations and provide customers the everyday value they have come to expect from McDonald’s.

Thompson also had this to say about sales for July:

As we begin the third quarter, global comparable sales for July are expected to be positive, but less than second quarter.

Competitor Yum! Brands Inc. (NYSE: YUM) reported lower-than-expected revenues and EPS last week, also due partly to currency translation. But Yum’s KFC and Taco Bell stores have raised prices by 3% to 4% in China, and the company expects the currency effects to be short-lived.

Rising commodity prices could put a double-whammy on foreign operations for both McDonald’s and Yum. In order to combat the exchange rate imbalance, the stores will have to raise prices. But they cannot raise them too far or too fast without risking the loss of customers.

The issue is more acute for McDonald’s, where operating income in the second quarter in its Asia/Pacific, Middle East and Africa division decreased by 2% (-1% in constant currency) and European income fell 3% (-8% in constant currency).

McDonald’s shares are down more than 2% at $89.50 in premarket trading. The 52-week range is $82.01 to $102.22.

Paul Ausick