What to expect from McDonald’s for the rest of 2012


After years of stellar performance, McDonald’s (NYSE: MCD) has disappointed shareholders this year. And rising input costs, persistent global economic headwinds, and fierce opposition may further delay the resurgence of this fast-food giant. Let’s take a look where McDonald’s has been so far this year and, more importantly, what to expect for the rest of 2012.

Where McDonald’s has been
While revenues have increased 16% over the past two years, margins have been feeling some pressure in recent quarters mostly due to higher input costs. All fast-food companies are facing this challenge, but their stock performances year to date are as varied as their menu offerings.

MCD Total Return Price Chart
MCD Total Return Price data by YCharts

Wendy’s (Nasdaq: WEN) stock has fared the worst and is down nearly 16% so far this year, while McDonald’s has lost 9% year to date. Yum! Brands (NYSE: YUM) and Panera Bread (Nasdaq: PNRA) have both enjoyed roughly 12% and 15% run-ups, respectively.

Relative newcomer Chipotle Mexican Grill‘s (Nasdaq: CMG) stock would be among companions Yum! and Panera had it not been for a recent 21% stock pullback after Chipotle reported year-over-year increases in both earnings per share of 60% and comparable store sales of 8% — a case of a company delivering outstanding performance, but with unrealistic expectations already baked into the share price.

Here’s what to expect from McDonald’s for the rest of this year.

Rising input costs
Beef, chicken, wheat, corn, and dairy products are prominent ingredients in McDonald’s menu. As the ongoing and severe U.S. drought plays out, major producers of these commodities are forcibly raising their prices, which affects McDonald’s input costs. McDonald’s noted these anticipated rising input costs in its 2011 10-K and its most recent quarterly report. Historically, McDonald’s has successfully hedged commodity costs, but a prolonged U.S. drought could negatively affect the company’s bottom line.

Prolonged global economic woes
Aside from the U.S. and Canada, McDonald’s major markets include the U.K., France, Germany, China, Japan, and Australia. In total, these markets comprise 70% of the company’s revenues. Although comparable store sales growth and market share are holding up, McDonald’s cited European austerity and challenging economies measures as putting pressure on the industry. Lacklustre overseas economies can challenge companies with vast global footprints — like McDonald’s and Yum! Brands.

Although comparable store sales and market share are holding strong, McDonald’s cited European austerity measures as a problem.

Company

Total Number of Locations Worldwide

Percentage of Locations Outside the U.S.

McDonald’s 33,510 68%
Wendy’s 6,594 5%
Yum! Brands 37,000 51%
Panera Bread 1,541 Less than 1%
Chipotle Mexican Grill 1,316 Less than 1%

Sources: Companies’ 2011 annual reports.

Global dominance comes with its advantages and its challenges. And most recently, McDonald’s has been a victim of its own successes. With a mere fraction of its total locations outside the U.S., small-fry competitors Wendy’s, Panera, and Chipotle have remained immune from these issues.

Spicy competition
While Yum! and Wendy’s are fast-food forces to be reckoned with, industry disrupters Panera and Chipotle are serious contenders to watch as they continually zest things up in this space. Founded in 1981 and 1993, respectively, Panera and Chipotle each boast a few decades worth of smart growth. Both companies offer healthy and refreshing alternatives to burgers and fries, boast very little debt on their balance sheets, and enjoy solid cash flows allowing them the fortitude to expand into new markets, make capital expenditures, and buy back shares.

McDonald’s response to these rivals has been fourfold: placing renewed emphasis on brand imaging, launching premium products, offering healthier menu options, and remodeling restaurants. So far, these efforts have paid off: McDonald’s enjoyed its ninth consecutive year of same-store-sales growth last year.

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The Motley Fools purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

A version of this article, written by Nicole Seghetti, originally appeared on fool.com

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