Monday, January 28, 2008

McDonald's Slides on Consumer Cutbacks

Ruthie Ackerman (Forbes)

McDonald’s fourth-quarter profit jumped on strong international sales, but flat domestic same-store sales in December sent the company’s shares sliding as investors worried that the downturn in the economy could impact the world’s No. 1 hamburger chain. The Oak Brook Ill.-based company’s shares slid 6.4%, or $3.48, to $50.62 in afternoon trading, but the decline held the Dow Jones industrial average back from even stronger gains. On Monday, McDonald's reported that its net income rose to $1.3 billion, or $1.06 per share, up from $1.2 billion, or $1 per share, in the prior year. Excluding income tax benefits of 33 cents per share, the company still earned 73 cents per share, beating analysts’ estimates of 71 cents per share. Sales rose 6% to $5.8 billion from $5.5 billion in the fourth quarter of 2006. Analysts polled by Thomson Financial predicted sales of $5.6 billion.

UBS analyst David Palmer said Europe's profit growth was the main driver in the quarter, but flat same-store sales in the U.S. were worse than expected. The company blamed its flat domestic same-store sales for December on winter weather and weaker consumer spending, but says it remains confident in its U.S. business. While its United States business posted same-store sales growth of 3.3% for the fourth quarter, global same-store sales soared 6.7% led by a 11.4% comparable sales increase in the Asia/Pacific, Middle East and Africa segment. Palmer said that McDonald's sales slowed substantially more than the industry in December, indicating that it benefited from Taco Bell's e-coli scare in December 2006. McDonald’s said it will begin paying its dividend on a quarterly basis in 2008. The next payout will be for 37.5 cents per share on March 17 for the first quarter to shareholders of record on March 3. The board will review the dividend rate on an annual basis each fall. Palmer maintained his "buy" rating and his $67 price target.

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