01—Abstract
Summary
Summary of the 10-K filed February 22, 2019. Cited figures are marked; the original filing is the authoritative source.
McDonald's Corporation's 2018 Form 10-K highlights a strategic shift towards a more heavily franchised model, with approximately 93%a of restaurants being franchised by year-end 2018 and a goal to reach approximately 95% long-term.
This move aims to generate more stable and predictable revenue streams while operating with a less resource-intensive structure. The company's 'Velocity Growth Plan' continued to show strength, driving positive global comparable sales for 14 consecutive quarters. Key growth accelerators include 'Experience of the Future' (EOTF) modernization, digital initiatives like mobile ordering and self-order kiosks, and expanding delivery services, which significantly increases average check size.
These initiatives are designed to enhance customer experience, drive guest count growth, and improve overall financial performance. Financially, despite an 8% decrease in consolidated revenues due to refranchising, the company reported an 18% increase in diluted earnings per share to $7.54b. Significant capital is being returned to shareholders through dividends and substantial share repurchases, demonstrating confidence in future cash flow generation.
02—Key points
Key Highlights
- Transitioning to a primarily franchised model (93% franchised by YE 2018) to enhance stability and reduce resource intensity.
- The 'Velocity Growth Plan' demonstrated success with 14 consecutive quarters of positive global comparable sales.
- Significant investments in 'Experience of the Future' (EOTF), digital platforms, and delivery services are enhancing customer experience and driving higher average checks.
- Diluted Earnings Per Share (EPS) increased by 18% to $7.54, driven by strategic initiatives and a lower effective tax rate.
- The company returned $8.5 billion to shareholders in 2018 through share repurchases and dividends, with a target of $25 billion for the three-year period ending 2019.
- Global comparable sales increased by 4.5% in 2018, with positive contributions across most segments.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 22, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $21.26B$22.82B | −6.8% |
| SG&A Expenses | $2.20B$2.23B | −1.4% |
| Operating Expenses | $12.44B$13.27B | −6.3% |
| Operating Income | $8.82B$9.55B | −7.6% |
| Interest Expense | $981.20M$921.30M | +6.5% |
| Net Income | $5.92B$5.19B | +14.1% |
| EPS (Basic) | $7.61$6.43 | +18.4% |
| EPS (Diluted) | $7.54$6.37 | +18.4% |
| Shares Outstanding (Basic) | 778.20M807.40M | −3.6% |
| Shares Outstanding (Diluted) | 785.60M815.50M | −3.7% |
05—Questions
Frequently Asked Questions
What is McDonald's strategy for future growth?
McDonald's strategy is centered around the 'Velocity Growth Plan,' which focuses on retaining, regaining, and converting customers. Key growth accelerators include modernizing restaurants through 'Experience of the Future' (EOTF), expanding digital offerings (mobile ordering, kiosks), and growing delivery services. The company is also transitioning to a more heavily franchised model to improve revenue stability.
How did the refranchising initiative impact the company's financial results?
The strategic refranchising initiative led to an 8% decrease in consolidated revenues as Company-operated sales were replaced by franchised revenues. However, it contributed to more stable and predictable cash flow streams. Despite the revenue decrease, diluted EPS saw an 18% increase, partly due to improved franchised margins and a lower effective tax rate.
What is the company's approach to returning capital to shareholders?
McDonald's is committed to returning capital to shareholders through dividends and share repurchases. In 2018, they returned $8.5 billion, and have a target of approximately $25 billion for the three-year period ending 2019. The company also continued its history of increasing its quarterly cash dividend, with a 15% increase in the fourth quarter of 2018.
What are the key risks facing McDonald's, as outlined in the filing?
Key risks include the inability to effectively execute business strategies, the risk that investments in customer experience (like technology) may not yield expected returns, failure to anticipate evolving consumer preferences, intense competition, unfavorable economic conditions, supply chain disruptions, food safety concerns, and challenges related to its franchise business model. Additionally, IT system failures and cybersecurity breaches pose significant risks.
06—Continue