10-QPeriod: Q3 FY2016

MCDONALDS CORP Quarterly Report for Q3 Ended Sep 30, 2016

Filed November 4, 2016For Securities:MCD

Summary

McDonald's Corporation reported its third-quarter and nine-month results for the period ending September 30, 2016. The company demonstrated positive comparable sales growth across all segments, indicating a continued recovery trend. Despite a slight decrease in consolidated revenues due to ongoing refranchising efforts, operating income and diluted earnings per share showed notable increases, especially when excluding the impact of restructuring and non-cash impairment charges. The company continued its aggressive share repurchase program and announced a dividend increase, underscoring its commitment to returning value to shareholders. Key financial metrics point to operational improvements and strategic execution. While total revenues saw a modest decline, this was largely a consequence of transitioning more restaurants to a franchised model, which generally leads to lower reported revenue but a more asset-light and potentially higher-margin business in the long run. The strategic shift towards franchising, combined with cost-saving initiatives and a focus on improving the customer experience, positions McDonald's for sustained growth and enhanced financial value.

Financial Statements
Beta
Revenue$6.42B
SG&A Expenses$582.90M
Operating Expenses$4.29B
Operating Income$2.14B
Interest Expense$221.40M
Net Income$1.28B
EPS (Basic)$1.52
EPS (Diluted)$1.50
Shares Outstanding (Basic)841.40M
Shares Outstanding (Diluted)847.70M

Key Highlights

  • 1Consolidated revenues decreased by 3% for the quarter and nine months, largely due to refranchising initiatives which shift revenue recognition from company-operated sales to franchised fees.
  • 2Global comparable sales increased by 3.5% in the third quarter and 4.2% for the first nine months, showing positive trends across all operating segments.
  • 3Operating income increased by 5% (7% in constant currencies) for the quarter and 10% (12% in constant currencies) for the nine months, boosted by improved operational performance and gains on restaurant sales.
  • 4Diluted earnings per share (EPS) saw significant growth, rising 7% (9% in constant currencies) for the quarter to $1.50 and 15% (17% in constant currencies) for the nine months to $4.01. Excluding restructuring charges, EPS growth was even stronger.
  • 5The company returned substantial capital to shareholders, repurchasing approximately $2.7 billion of stock in the third quarter, bringing year-to-date repurchases to $9.8 billion, and announced a 6% increase in its quarterly dividend.
  • 6Long-term strategic priorities include refranchising approximately 4,000 restaurants by 2018 to achieve a 95% franchised model and realizing significant annual General & Administrative (G&A) savings.

Frequently Asked Questions

Consolidated revenues decreased primarily due to the company's ongoing strategy of refranchising company-operated restaurants to franchisees. While this transition reduces reported revenue as company-operated sales are replaced by franchised fees (rent and royalties), it aligns with the company's goal of becoming a 95% franchised business, which is expected to generate more stable and predictable cash flows and a more asset-light structure.

The company incurred pre-tax restructuring and non-cash impairment charges of $128 million in the third quarter and $357 million for the first nine months. These charges negatively impacted reported operating income and net income. However, when these charges are excluded, the underlying operational performance and growth in earnings per share are significantly stronger, indicating the positive effects of the turnaround plan and operational improvements.

McDonald's is actively returning value to shareholders through a combination of share repurchases and dividend payments. In the third quarter, the company spent $2.7 billion on share repurchases, and year-to-date repurchases totaled $9.8 billion. Additionally, the company announced a 6% increase in its quarterly dividend, demonstrating confidence in its financial performance and commitment to shareholder returns.

For the full year 2016, McDonald's expected a decrease of about 4.5-5.0% in U.S. commodity basket costs. Conversely, interest expense was projected to increase significantly, about 40-45% compared to 2015, due to higher average debt balances resulting from its capital structure optimization plans.