This Company Missed Estimates, but Can Improve in the Future

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Fast food giant McDonald’s (NYSE: MCD) recently released its second-quarter results which turned out to be below expectations. Although revenue increased, McDonald's faced problems in cutting costs and improving profits. With results being not so spectacular, the company's forecast of a tough year ahead makes things worse.

What numbers say?

McDonald’s, in its second quarter, reported an increase of 2.4% in revenue to around $7.08 billion, which was below consensus estimates of $7.09 billion. Global comparable sales increased 1% in the quarter, beating the estimated 0.8%. Sales were reported to be weak in Europe and China due to high tax rates and the effect of avian flu.

Net income increased 3.7% to $1.4 billion from $1.35 billion last year. Earnings per share came in at $1.38, up from last year by $0.06 per share, but were below analysts' estimate of $1.40 per share. The company said that it witnessed high foreign currency rate fluctuations, which reduced its quarterly profit by 2%.

What next?

Despite a setback in Europe, Russia, and Germany, the company is still taking up its expansion plan in Vietnam, focusing on the eager young population of the continent. It is actively advertising its affordable items like the "Dollar Menu" and “combo meals” for customers who are on a budget. By opting for extensive advertisement, healthier, fresher sounding items, and its late night breakfast services, McDonald’s is aiming to bring in more traffic to its restaurants. It is adding various new products, like the hamburgers -- including a bacon habanero and the egg white version of its McMuffin -- to make its products healthier and low on calories.

The company is aiming to reduce its capital expenditure and has reduced its new location estimate from 1,600 to 1,500. Analysts believe that its entry into emerging markets like Vietnam may provide a boost to the company, but McDonald’s lacks the first mover advantage here. McDonald’s is facing difficulties because of its incapability to earn higher profits from its existing low prices. The company incurs various costs that are outside of its control, like commodity expenses and locally-governed employee expenses.

McDonald's is now streamlining its menu by reducing items like Caesar Salad, The McSkillet Burrito, and the Bagels, as they reduce the efficiency per crew hour. The company is facing problems in providing faster services to the drive-through segment, with its competitors like Chipotle Mexican Grill, Burger King Worldwide (NYSE: BKW), and Wendy’s (NASDAQ: WEN) offering quicker and better services.

What are competitors doing

While McDonald’s is attracting customers with lower prices, Burger King Worldwide plans on accelerating its expansion in South Africa and other parts of the continent to benefit from the growing middle class. With doubling of the middle class in South Africa in the last eight years, and with the expected expansion of the African economy, this year, the company plans on opening 12 new branches in the African continent.

Burger King’s Partnership with Grand Parade Investments should help the company in its expansion plan and compete against the likes of McDonald's. But, Burger King is a late entrant into this market and we need to wait and watch if it can pose a serious challenge to McDonald's.

At the same time, Wendy’s, a smaller U.S.-based rival, is coming up with products like the Pretzel Bacon Cheeseburger, which is the latest best selling item on the menu. Wendy’s, known for its Frosty shakes and square hamburgers, may put pressure on McDonald’s in the future through innovative menu items. The company, with its low on calories berry almond chicken salad, has started proving to be a tough competition for McDonald’s.

Conclusion

With competition intensifying, McDonald’s estimates a tough year ahead. The company is trying to shrink its menu from the current 145 dishes so as to provide quicker and better services, and also to improve its drive-through time. With an increase in awareness regarding obesity and calorie intake, McDonald's is trying to add low on calorie, healthier dishes, like the egg-white sandwich. With a revamp of the strategy, McDonald’s plans to attract customers, and thereby, it could perform better in the future.

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ANUP SINGH has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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