10-QPeriod: Q3 FY2017

MCDONALDS CORP Quarterly Report for Q3 Ended Sep 30, 2017

Filed November 2, 2017For Securities:MCD

Summary

McDonald's Corporation's third-quarter 2017 results, filed on November 2, 2017, demonstrate a significant turnaround and strategic shift. The company reported substantial increases in net income and diluted earnings per share compared to the prior year, largely driven by a substantial gain from the sale of its China and Hong Kong businesses. This strategic divestiture, part of a broader refranchising initiative, is transforming McDonald's into a more focused and efficient organization. The company also showcased strong comparable sales growth across all segments, indicating successful execution of its customer-centric growth strategy, including initiatives like 'Experience of the Future' (EOTF) and digital enhancements. While consolidated revenues saw a decline due to the refranchising efforts, systemwide sales growth and improved operating income highlight the underlying strength and positive momentum of the business. Investors can note the continued commitment to returning capital to shareholders through dividends and share repurchases.

Financial Highlights

49 data points
Beta

Revenue

$5.75B

Net Income

$1.88B

32.7% Net Margin

EPS (Diluted)

$2.32

Total Assets

$32.56B

Cash & Equivalents

$2.67B

Free Cash Flow

$1.27B

Financial Statements
Beta
Revenue$5.75B
SG&A Expenses$567.00M
Operating Expenses$2.68B
Operating Income$3.08B
Interest Expense$236.70M
Net Income$1.88B
EPS (Basic)$2.34
EPS (Diluted)$2.32
Shares Outstanding (Basic)805.30M
Shares Outstanding (Diluted)813.50M

Key Highlights

  • 1Net income for the quarter surged by 48% year-over-year to $1.88 billion, with diluted EPS increasing 55% to $2.32, significantly boosted by an $850 million pre-tax gain on the sale of China and Hong Kong businesses.
  • 2Global comparable sales increased by 6.0% in the third quarter, indicating positive customer traffic and successful sales initiatives across all operating segments (U.S., International Lead Markets, High Growth Markets).
  • 3Consolidated revenues decreased by 10% (12% in constant currency) due to the strategic refranchising of company-operated restaurants, aligning with the long-term goal of a more heavily franchised model.
  • 4Operating income saw a substantial increase of 44% (42% in constant currency) to $3.08 billion, primarily due to the gain on the China/Hong Kong sale and improved underlying operational performance.
  • 5The company returned $2.9 billion to shareholders in the third quarter through share repurchases ($2.2 billion) and dividends ($0.7 billion), with year-to-date returns reaching $6.3 billion.
  • 6Systemwide sales increased by 7% in constant currencies for both the quarter and the nine-month period, reflecting strong comparable sales performance and restaurant expansion.
  • 7Investments in 'Experience of the Future' (EOTF) are progressing, with plans to have EOTF elements in approximately 2,500 U.S. restaurants by the end of 2017.

Frequently Asked Questions

The primary driver for the substantial increase in net income was the gain of approximately $850 million recorded from the sale of McDonald's businesses in China and Hong Kong, which was completed on July 31, 2017. This strategic divestiture is part of the company's long-term plan to refranchise its operations.

Consolidated revenues decreased because of the company's ongoing strategic refranchising initiative. As McDonald's transitions company-operated restaurants to franchised models, its reported revenues decrease because it recognizes royalty and rent income from franchisees rather than the full sales revenue from those operations. This shift is intended to create a more stable and predictable revenue stream.

McDonald's is executing its growth strategy, the 'Velocity Growth Plan,' with a focus on retaining and regaining customers. Key initiatives include 'Experience of the Future' (EOTF) for restaurant modernization and technology upgrades, digital enhancements like mobile ordering and self-order kiosks, and expanding its delivery service. These efforts aim to improve the customer experience and drive traffic.

McDonald's demonstrated a strong commitment to returning capital to shareholders. In the third quarter of 2017, the company returned $2.9 billion through share repurchases and dividends. For the first nine months of the year, total returns to shareholders amounted to $6.3 billion, highlighting a consistent capital allocation strategy.