10-QPeriod: Q1 FY2018

MCDONALDS CORP Quarterly Report for Q1 Ended Mar 31, 2018

Filed May 8, 2018For Securities:MCD

Summary

McDonald's Corporation's first quarter 2018 results, filed May 7, 2018, show a revenue decrease of 9% (15% in constant currencies) to $5.14 billion. This decline is primarily attributed to the ongoing strategic refranchising initiative, which shifts revenue from Company-operated sales to franchised revenues. Despite the revenue dip, Net Income rose 13% year-over-year to $1.38 billion, translating to a 17% increase in diluted Earnings Per Share (EPS) to $1.72. The company also reported strong global comparable sales growth of 5.5%, indicating underlying operational strength. Key drivers included positive comparable sales in the U.S. (2.9%), International Lead Markets (7.8%), and High Growth Markets (4.7%), demonstrating resilience in customer demand. Management highlighted continued execution of the Velocity Growth Plan, with advancements in Experience of the Future (EOTF) restaurant modernization, digital initiatives, and expanding delivery services. These strategic efforts are aimed at enhancing customer experience and driving sustainable guest count growth. The company returned $2.5 billion to shareholders through share repurchases and dividends, signaling confidence in its financial position and commitment to shareholder value. While the refranchising strategy impacts reported revenue, the growth in franchised margins and operating income suggests a more efficient and focused business model.

Financial Highlights

48 data points
Beta

Revenue

$5.14B

Net Income

$1.38B

26.8% Net Margin

EPS (Diluted)

$1.72

Total Assets

$33.72B

Cash & Equivalents

$2.47B

Free Cash Flow

$1.09B

Financial Statements
Beta
Revenue$5.14B
SG&A Expenses$533.10M
Operating Expenses$3.00B
Operating Income$2.14B
Interest Expense$236.80M
Net Income$1.38B
EPS (Basic)$1.74
EPS (Diluted)$1.72
Shares Outstanding (Basic)790.90M
Shares Outstanding (Diluted)798.70M

Key Highlights

  • 1Total revenues decreased by 9% to $5.14 billion, primarily due to the ongoing refranchising of Company-operated restaurants.
  • 2Net income increased by 13% to $1.38 billion, and diluted EPS grew by 17% to $1.72.
  • 3Global comparable sales increased by a healthy 5.5%, driven by positive performance across all segments, especially International Lead Markets (+7.8%) and High Growth Markets (+4.7%).
  • 4The company returned $2.5 billion to shareholders in the first quarter through share repurchases and dividends.
  • 5Progress continues on the Experience of the Future (EOTF) initiative, with approximately one-third of global restaurants modernized, and half of U.S. restaurants planned for completion by year-end 2018.
  • 6The adoption of ASC 606 (Revenue Recognition) is expected to negatively impact 2018 franchised revenues by approximately $50 million, though the impact in Q1 was only $5 million.
  • 7The effective income tax rate decreased to 27.1% from 32.8% in the prior year, benefiting from the lower U.S. corporate tax rate.

Frequently Asked Questions

The decrease in total revenues is primarily a result of McDonald's strategic refranchising initiative. This initiative involves selling Company-operated restaurants to franchisees. While this leads to lower consolidated revenues as sales shift from Company-operated to franchised, it is intended to create a more stable and efficient business model with higher margin franchised revenues.

The Experience of the Future (EOTF) initiative focuses on modernizing restaurants with updated design, technology, and customer service improvements. It aims to enhance the customer experience, drive incremental visits, and increase average check size. McDonald's is accelerating its rollout, with plans for half of its U.S. restaurants to be EOTF-compliant by the end of 2018.

The adoption of ASC 606, which standardizes revenue recognition, has changed how McDonald's recognizes initial franchise fees. Previously recognized upon receipt, these fees are now recognized over the term of the franchise agreement (typically 20 years). This change is expected to reduce reported franchised revenues by approximately $50 million in 2018, although the actual impact in the first quarter was minimal due to timing.

The Tax Cuts and Jobs Act of 2017 led to a significant reduction in the U.S. corporate tax rate, which positively impacted McDonald's effective income tax rate in the first quarter of 2018. The company also recorded adjustments to provisional amounts related to the TCJA, resulting in an additional income tax expense of $52 million ($0.07 per share) in the quarter, but the overall benefit of the lower tax rate was still evident.