Exchange Rates Impacting QSR's

  • June 8, 2010
Both McDonald's and Burger King are reporting that unfavorable currency exchange rates are expected to impact their performance financial performance.

McDonald's said that foreign currency rates -- particularly the Euro, which accounts for approximately 25% of the company's consolidated operating income -- are expected to negatively impact net income per share for the full current year, although they should have negligible impact on second quarter net income per share.

However, that information was imparted along with a report that McDonald's continued to see healthy sales growth in May. 

The QSR said that its global comparable-store sales rose 3.4%, and its U.S. comp sales rose 3.4%, during the month. Systemwide sales increased 5.5%, or 6.2% in constant currencies, in May, marking the chain's 85th consecutive month of global systemwide sales gains.

Burger King, meanwhile, reported that it expects foreign currency exchange rates, primarily for the Euro and British pound, to reduce its earnings per share by 1 to 2 cents in its fiscal fourth quarter, but expects no impact, or only a slight negative effect, on its full-year earnings. 



Analysts noted that BK had previously indicated that currency exchange would have a positive effect on Q4 earnings and a slightly positive effect for the full fiscal year.

As a result of closing 55 restaurants in Israel, Burger King also lowered its worldwide restaurant expansion goals to 230 to 250 (from 250 to 300), and Zacks Equity Research pointed out that the closures will impact fourth quarter results by reducing royalties.  However, BK management stressed that the Israeli scenario will not affect growth plans in Europe and elsewhere in the Middle East.

BK generates about 26% of its company store-owned revenues from EMEA/APAC, and 90% of the 360 locations it opened last year were outside the U.S., according to Zacks. While BK's strategy of expanding in large markets such as Japan, Turkey and Russia exposes the company to increased currency translation risk, the analysts also expect favorable peso currency exchange rates in the Latin American market to help balance out the Euro's effects.

McDonald's is likely to experience less volatility from exchange rates because the company has about 45% of its debt denominated in foreign currencies in order to mitigate the impact of fluctuations, Zacks reports.

In its most recent (fiscal third quarter) financial report issued in late April, BK reported comp-store sales down 3.7% (versus a 1% gain in comp sales in the previous year's fiscal Q3). U.S./Canadian comp sales were down 6.1% (versus a 1.6% gain in the previous year's Q3), although restaurant margins improved by 20 basis points, to 12.9%. Diluted earnings per share were $0.30, compared to $0.34 in the previous year's Q3.

On June 3, BK's board declared a quarterly dividend of $0.0625 per share of common stock, payable to shareholders on June 14. --Karlene Lukovitz

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