10-QPeriod: Q2 FY2018

MCDONALDS CORP Quarterly Report for Q2 Ended Jun 30, 2018

Filed August 2, 2018For Securities:MCD

Summary

McDonald's Corporation's (MCD) Q2 2018 filing shows continued positive trends in global comparable sales, indicating ongoing consumer demand for its offerings. Despite a decrease in consolidated revenues due to the ongoing refranchising strategy, which aims to create a more efficient and stable business model, the underlying systemwide sales growth remains robust. Net income and diluted earnings per share saw healthy increases, supported by a lower effective tax rate and effective share repurchase programs. The company is actively investing in its "Experience of the Future" (EOTF) initiative, digital enhancements, and delivery services to drive future growth and enhance customer experience. Management highlighted the strategic importance of franchising for long-term success and profitability. While consolidated revenues are impacted by the shift to a franchised model, the underlying franchised margins and systemwide sales demonstrate strength across key markets. Investors should note the impact of strategic restructuring charges and adjustments related to the Tax Cuts and Jobs Act on reported earnings, but also observe the company's underlying operational improvements and commitment to returning capital to shareholders through dividends and share repurchases.

Financial Highlights

51 data points
Beta

Revenue

$5.35B

91.0% Gross Margin

Net Income

$1.50B

27.9% Net Margin

EPS (Diluted)

$1.90

Total Assets

$32.71B

Cash & Equivalents

$1.62B

Free Cash Flow

$727.50M

Financial Statements
Beta
Revenue$5.35B
Cost of Revenue$483.90M
Gross Profit$4.87B
SG&A Expenses$542.10M
Operating Expenses$3.09B
Operating Income$2.26B
Interest Expense$240.20M
Net Income$1.50B
EPS (Basic)$1.92
EPS (Diluted)$1.90
Shares Outstanding (Basic)780.00M
Shares Outstanding (Diluted)787.10M

Key Highlights

  • 1Global comparable sales increased 4.0% for the quarter and 4.7% for the six months, indicating sustained customer traffic and spending.
  • 2Consolidated revenues decreased 12% for the quarter and 11% for the six months, primarily due to the strategic refranchising initiative, which shifts the business towards a more franchised model.
  • 3Net income increased 7% to $1,496.3 million for the quarter and 10% to $2,871.7 million for the six months, aided by a lower effective tax rate and foreign currency tailwinds.
  • 4Diluted earnings per share rose 12% to $1.90 for the quarter and 14% to $3.62 for the six months, demonstrating effective capital return strategies including share repurchases.
  • 5Significant investments are being made in 'Experience of the Future' (EOTF) modernization and digital initiatives, with EOTF deployed in about one-third of global restaurants.
  • 6The company returned $2.5 billion to shareholders in the quarter through share repurchases and dividends, totaling $4.9 billion for the six months.
  • 7A new revenue recognition standard (ASC 606) is impacting the timing of initial franchise fee recognition, expected to have a minor impact on 2018 revenues.

Frequently Asked Questions

The ongoing refranchising strategy, aimed at optimizing the company's restaurant ownership mix to be approximately 95% franchised long-term, leads to a decrease in consolidated revenues. This is because Company-operated sales are replaced by franchised revenues (rent and royalties), which are lower on a consolidated basis. However, this strategy is intended to create a more stable and efficient business with predictable revenue and cash flow streams.

The company recognized provisional amounts for the tax effects of the TCJA in 2017 and made adjustments in Q1 2018 and Q2 2018. For the six months ended June 30, 2018, there was an additional income tax expense of approximately $52 million ($0.07 per share) related to adjustments to these provisional amounts. Excluding these adjustments, the effective income tax rate for the six months was 25.1%.

The EOTF initiative focuses on restaurant modernization and technology to enhance the customer experience, aiming to drive incremental customer visits and higher average checks. McDonald's has deployed EOTF in about one-third of its restaurants globally and expects about half of U.S. restaurants to be EOTF-enabled by the end of 2018. The company is investing approximately $1.5 billion in U.S. capital expenditures for EOTF acceleration in 2018. While the investment is significant, it's expected to support future growth and profitability.

McDonald's faces exposure to foreign currency fluctuations, particularly with the Euro, British Pound, Australian Dollar, and Canadian Dollar. The company mitigates these risks by purchasing goods and services in local currencies, financing in local currencies, and using derivative instruments such as foreign currency forwards and foreign currency denominated debt for hedging. The reported results showed a positive impact from foreign currency translation in this quarter, primarily due to stronger Euro and British Pound.