10-KPeriod: FY2017

MCDONALDS CORP Annual Report, Year Ended Dec 31, 2017

Filed February 23, 2018For Securities:MCD

Summary

McDonald's Corporation's 2017 10-K filing highlights a strategic shift towards long-term growth driven by the "Velocity Growth Plan." This plan focuses on customer-centric initiatives, including enhancing the food and value proposition, improving the customer experience through "Experience of the Future" (EOTF) modernizations and digital integration, and expanding delivery services. The company reported strong comparable sales growth across all segments, signaling a successful transition from a turnaround phase to a growth phase. Financially, McDonald's demonstrated improved operating income and diluted EPS in 2017, partly due to a gain from the sale of its China and Hong Kong businesses. The company also continued its strategy of refranchising, achieving its target of 4,000 refranchised restaurants ahead of schedule, moving closer to its long-term goal of approximately 95% franchised operations. This strategy aims to provide more stable revenue streams and lower operating costs. Shareholder returns were robust, with significant amounts distributed through dividends and share repurchases.

Financial Highlights

49 data points
Beta

Revenue

$22.82B

Net Income

$5.19B

22.8% Net Margin

EPS (Diluted)

$6.37

Total Assets

$33.80B

Cash & Equivalents

$2.46B

Free Cash Flow

$3.70B

Financial Statements
Beta
Revenue$22.82B
SG&A Expenses$2.23B
Operating Expenses$13.27B
Operating Income$9.55B
Interest Expense$921.30M
Net Income$5.19B
EPS (Basic)$6.43
EPS (Diluted)$6.37
Shares Outstanding (Basic)807.40M
Shares Outstanding (Diluted)815.50M

Key Highlights

  • 1McDonald's successfully executed its "Velocity Growth Plan" in 2017, leading to the best comparable sales performance in six years with a 5.3% increase globally.
  • 2The company achieved its target of refranchising 4,000 restaurants, advancing its strategy to become approximately 95% franchised, which is expected to yield more stable revenue and cash flow.
  • 3Operating income saw a significant increase of 23% (in constant currencies), boosted by a gain from the sale of businesses in China and Hong Kong.
  • 4Diluted earnings per share (EPS) increased by 17% (in constant currencies) to $6.37, reflecting improved operational performance and share repurchases.
  • 5Investments in 'Experience of the Future' (EOTF) modernization and digital initiatives are progressing, with approximately one-third of global restaurants modernized and strong adoption of the mobile app in the U.S.
  • 6Delivery services were expanded to over 10,000 restaurants globally, contributing to convenience and higher average check sizes.
  • 7The company returned approximately $7.7 billion to shareholders in 2017 through dividends and share repurchases, underscoring a commitment to shareholder value.

Frequently Asked Questions

McDonald's key strategic priorities for growth are outlined in its "Velocity Growth Plan," which focuses on a customer-centric approach. This includes retaining existing customers, regaining lost customers by emphasizing food quality and value, and converting casual customers to committed ones by enhancing offerings like McCafé and snacks. The plan also leverages growth accelerators such as 'Experience of the Future' (EOTF) modernization, digital integration (mobile app, kiosks), and delivery services.

The refranchising strategy is central to McDonald's financial strategy, aiming for a more heavily franchised model (targeting ~95% franchised) to generate more stable and predictable revenue and cash flow streams with lower operating costs and capital intensity. While refranchising reduces consolidated revenues as company-owned sales are replaced by franchised revenues (rent and royalties), it improves operating margins and is expected to drive stronger operating income growth, particularly from comparable sales growth.

The Tax Cuts and Jobs Act of 2017 significantly impacted McDonald's. It reduced the U.S. federal corporate tax rate to 21%. McDonald's recorded a provisional net tax cost of approximately $700 million in 2017, which included a deemed repatriation charge of about $1.2 billion for previously untaxed foreign earnings, partly offset by a benefit of approximately $500 million from revaluing deferred tax assets and liabilities to the new lower tax rate. This legislation is expected to provide an incremental cash flow benefit of $400-$500 million annually going forward.

McDonald's is actively addressing evolving consumer preferences by focusing on food quality, taste, and nutrition. Initiatives include introducing fresh beef for Quarter Pounders in the U.S., expanding the McCafé line with new flavors, and continuously evolving the menu. The company also emphasizes transparency in sourcing and ingredients as part of its "Scale for Good" initiative, aiming to build customer trust and ensure customers feel good about their choices.