McDonald’s Corporation (MCD) Not Cheap But Digestible

The word “innovation” is constantly thrown around in the tech sector. Very rarely are other company’s beyond tech get credit for their outside-the-box thinking. To that end, the evolution of McDonald’s Corporation (NYSE:MCD) over the years have been impressive. When it comes to innovation, the company is unparalleled with its strategic pricing and its evolving menu. However, concerns about decreasing margins has compelled Mickey D’s to rethink its offerings. But will it be enough?

The company recently decided to drop a few items from its menu, including Chicken Selects and its Fruit & Walnuts salad. McDonald’s Corporation (NYSE:MCD) is hoping to prolong what appears to be a revival in its stock price, which has gained 9% so far on the year after a lackluster 2012. But will these moves be enough to expect gourmet returns for the entire year, especially since fourth-quarter results didn’t exactly wow investors.

Looking for better margins
For that matter, the entire service sector has been unimpressive. But McDonald’s did what it had to do to show the long-term growth capabilities that still remain. Revenue increased roughly 2% year over year. It’s not a robust number. But not much more is expected from a company this size. In constant currencies, however, systemwide sales grew 5% as total comparable sales advanced 3.1% year over year. This metric tracks sales performances for restaurants opened at least a year.

However, comps arrived flat for the quarter, which is why the company is looking to adjust its menu. It’s not as easy as it use to be to beat Burger King Worldwide Inc (NYSE:BKW) and The Wendy’s Company (NASDAQ:WEN) just by having the golden arches illuminating brightly from the skies. Both rivals have ramped up their marketing and menu to compete head-on with McDonald’s, which has resulted in margin pressure due to the soft economy. Consequently, McDonald’s Corporation (NYSE:MCD) has begun to place an emphasis on the bottom line.

To that end, profitability was OK, despite the 60-basis-point decline in gross margin. The company said this was due to higher franchise expenses. But this was offset by a 4% increase in operating income, which advanced due to better cost management and lowered expenses. Likewise, though company-operated margins declined by almost 1% year over year, McDonald’s Corporation (NYSE:MCD) did slightly worse relative to Burger King, whose company-operated margins were down about a half a percent year over year. Likewise, Wendy’s 14.2-.5% company-operated margin was slightly up year over year.

Is there still growth ahead?
I started off by discussing the tough 2012 environment. Relative to expectations, however, McDonald’s didn’t perform that badly. The company’s ability to adapt continues to make a difference. But the climate in 2013 is not going to get any easier. Last month, McDonald’s announced a 2% decline in global comps, with U.S. being the only one among the geographic regions showing growth.