McDonald’s Q1 Earnings Preview: Profits Seen Down 2.7%

By Angelo Young - In the fast-food world, breakfast has lately gotten crowded -- bad news for McDonald's, which derives a fifth of its American revenues from sales of Egg McMuffins, hash browns and other morning fare.

Trouble capturing enough breakfast customers is expected feature prominently in the report McDonald's Corporation (NYSE:MCD) plans to release before the markets open in New York on Tuesday detailing its sales and earnings over the first three months of 2014.

Forecasts anticipate that the fast food chain -- the world's largest by sales --  will report a 2.7 percent drop in net profit, to $1.24 billion, compared to the first quarter of 2013, according to analysts polled by Thomson Reuters. Earnings per share is expected to come in at $1.24 on revenue of $6.73 billion. For the quarter, the company’s stock price increased 1 percent to $97.24.

Harsh winter weather in the U.S., a stronger dollar and weakness in Europe and Asia have combined to limit prospects at the McDonald's, the world’s largest restaurant chain by sales.

“The competitive environment remains challenging in the fast-food industry, particularly in the U.S., as chains compete for foot traffic in a still-soft retail environment,” Deutsche Bank analyst Jason West, said this week in a research note. “MCD has significant exposure to foreign currencies (most notably the euro and UK pound), which could cause volatility in sales and earnings.”

Analysts also point to a menu that’s too big, and the company’s initiative to redesign prep tables for faster service isn’t expected to begin until late this year. Meanwhile, the 59-year-old Oak Brook,

Ill., company is seeing only incremental traffic from its re-launched Dollar Menu, called Dollar Menu and More, while its premium Clubhouse Burger “may have fallen short of expectations,” according to Jeffries equity analyst Andy Barish. In March the company was forced to cut its Mighty Wings losses by dropping the price by 40 percent to unload millions of pounds of the chicken parts that didn’t sell as well as the company expected.

The winter weather in this past quarter that hit much of America kept many consumers away. U.S. same-store sales fell 3.3 percent in January, which offset increases in Asia, the Middle East and Europe where sales grew between 2 percent and 5.4 percent. Globally, the sales increased 1.2 percent in January, but they declined 0.3 percent in February. Because the sales are in dollars, McDonald’s makes more from U.S. sales and franchise revenue from the 80 percent of stores that are independently owned. Traffic in the U.S. has the greater impact on the company’s financials.

Last year, same-stores sales grew only 0.2 percent and the consensus shows the same for the first quarter of 2013. Same-store sales is a key measurement that excludes data from restaurants that have been open for less than a year and more accurately reflect general traffic to the company’s more than 35,000 restaurants.

As the company struggles to attract consumers it’s also facing a double team going after its $10 billion breakfast segment where for decades the Egg McMuffin has helped the company retain the top spot in the breakfast niche.

Yum! Brands Inc. NYSE:YUM, the Louisville, Ky., owner of KFC, Pizza Hut and Taco Bell, and Seattle’s Starbucks Corp. NASDAQ:SBUX, have both added breakfast menu items to their roster in an attempt to grab some of the 30 percent U.S. market share McDonald’s has of the breakfast crowd. Yum’s Taco Bell chain added in late March waffle tacos, breakfast wraps and egg burritos to most of the company’s 3,700 U.S. restaurants. Starbucks also launched in March baked goods under the La Boulange brand and new breakfast sandwich items.

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