OAK BROOK Ill. McDonald’s Corp. said first-quarter results will be hurt by volatile foreign currency exchange rates and higher commodity costs, even as sales continue to surge.
Posting better-than-expected February same-store sales results on Monday, the No. 1 burger chain said that weaker foreign currencies against the U.S. dollar, especially in Eastern Europe, will pressure revenue and margin comparisons in the first quarter. If foreign currency rates remain at current levels, McDonald’s said, currency translation will hurt first-quarter revenues by at least $600 million and earnings by between 7 cents and 9 cents per share. Those projections were worse than what McDonald’s had estimated during its fourth-quarter report in January.
In February alone, for example, McDonald’s systemwide sales fell 4.6 percent from a year ago when taking into account currency conversions. Sales in the company’s European division fell 15.9 percent. Excluding foreign exchange conversions, February system sales would have increased 3.2 percent from a year ago, and sales in Europe would have increased 1.7 percent.
“We remain confident in the fundamental strength of the McDonald’s business,” said chief executive Jim Skinner. “We have the right strategies in place to grow the business for the long-term and we have the operating experience to manage through the current environment.”
In addition, McDonald’s said commodity cost pressures are expected to have a greater impact on its results during the first half of the year, but it did not detail by how much. First-quarter earnings also will include a gain of between 3 cents and 4 cents per share from the sale of the company’s minority stake in Redbox Automated Retail LLC, a DVD rental company, McDonald’s said.
Many analysts reduced the company’s expected per-share-profit target for the first quarter because of McDonald’s latest estimates, but they also noted the top-line strength the chain continues to show despite a worsening U.S. recession.
Global February same-store sales rose 1.4 percent, even with a 4-percentage-point benefit garnered a year ago from an extra operating day from Leap Year. Excluding that year-ago gain, McDonald’s February global same-store sales would have increased 5.4 percent.
U.S. same-store sales increased 2.8 percent, or 6.8 percent excluding the year-earlier Leap Year benefit. Many analysts had expected the chain to post flat or slightly negative same-store sales for the U.S. segment in February. McDonald’s said its strong U.S. result was driven by its chicken products, Quarter Pounder, which it marketed during the month, and its beverages and breakfast.
In Europe, same-store sales fell 0.2 percent, which reflected a negative hit of 4.2 percentage points from the year-ago Leap Year calendar shift. McDonald’s Asia-Pacific, Middle East and Africa region reported a same-store sales increase of 0.7 percent, which reflected a negative calendar shift of 3.4 percentage points.
“Our thesis that McDonald’s same-store sales momentum is likely to continue, but earnings-per-share is unlikely to follow remains in play,” analyst Jeff Farmer, at Jefferies & Co., said in a note to investors. “The company again put up consensus beating same-stores results, and while top-line opportunities remain, [the] margin, returns on invested capital, refranchising and increased dividend [or] repurchase opportunities are largely in the rearview mirror.”
This month, McDonald’s is expected to promote its value menu and to continue the rollout of its McCafe beverage program, which is currently in about 8,500 locations and is expected to be completed by the summer.
McDonald’s operates or franchises more than 32,000 restaurants worldwide.
Contact Sarah E. Lockyer at [email protected].
