10-QPeriod: Q3 FY2018

MCDONALDS CORP Quarterly Report for Q3 Ended Sep 30, 2018

Filed November 1, 2018For Securities:MCD

Summary

McDonald's Corporation's third-quarter 2018 report shows a strategic shift towards a more franchised business model, which impacted consolidated revenues but demonstrated underlying operational strength. While total revenues saw a decline due to the refranchising initiative, comparable sales across all segments showed positive growth, indicating continued customer engagement. The company continues to invest in "Experience of the Future" (EOTF) and digital initiatives to enhance customer experience and drive future growth. Financially, the quarter presented a mixed picture with decreased net income and diluted EPS compared to the prior year, largely due to a significant gain from the sale of China and Hong Kong businesses in Q3 2017. However, when excluding these one-time items and strategic restructuring charges, underlying earnings per share showed robust growth. The company also returned substantial capital to shareholders through dividends and share repurchases, highlighting a commitment to shareholder value.

Financial Highlights

50 data points
Beta

Revenue

$5.37B

90.7% Gross Margin

Net Income

$1.64B

30.5% Net Margin

EPS (Diluted)

$2.10

Total Assets

$34.05B

Cash & Equivalents

$2.57B

Free Cash Flow

$1.77B

Financial Statements
Beta
Revenue$5.37B
Cost of Revenue$499.40M
Gross Profit$4.87B
SG&A Expenses$515.20M
Operating Expenses$2.95B
Operating Income$2.42B
Interest Expense$250.10M
Net Income$1.64B
EPS (Basic)$2.12
EPS (Diluted)$2.10
Shares Outstanding (Basic)772.80M
Shares Outstanding (Diluted)779.60M

Key Highlights

  • 1Global comparable sales increased by 4.2% for the quarter and 4.5% for the nine months, driven by positive performance across all segments.
  • 2Consolidated revenues decreased by 7% (5% in constant currencies) for the quarter and 9% (11% in constant currencies) for the nine months, primarily due to the ongoing strategic refranchising initiative.
  • 3Diluted earnings per share (EPS) decreased by 9% for the quarter and increased by 4% for the nine months. Excluding significant prior-year gains and current-year restructuring charges, adjusted diluted EPS showed strong growth of 19% and 17% for the quarter and nine months, respectively.
  • 4The company returned $1.7 billion to shareholders through share repurchases and dividends in the quarter, totaling $6.6 billion for the nine months.
  • 5Investments in 'Experience of the Future' (EOTF) continue, with over 40% of global restaurants modernized and over half of U.S. restaurants expected to be EOTF-equipped by year-end 2018.
  • 6Delivery service is expanding, available from over 15,000 restaurants in over 65 markets, with a focus on increasing restaurant count and customer awareness.
  • 7The effective income tax rate decreased to 24.2% for the quarter and 25.7% for the nine months, primarily reflecting the lower U.S. corporate tax rate.

Frequently Asked Questions

The decrease in consolidated revenues is primarily a result of the company's strategic refranchising initiative. As McDonald's transitions to a more heavily franchised model, sales from Company-operated restaurants (which are recorded as revenue) are replaced by franchised revenues (where McDonald's receives rent and royalty fees). While this impacts reported consolidated revenue, it aligns with the company's strategy to optimize its ownership mix for more stable and predictable cash flows.

McDonald's is focusing on three key growth accelerators: 'Experience of the Future' (EOTF) for restaurant modernization and technology upgrades, enhancing its Digital capabilities (mobile app, kiosks, digital payment), and expanding its Delivery service. These initiatives aim to improve the customer experience, increase convenience, and drive incremental visits and higher average checks.

McDonald's adopted ASC 606 effective January 1, 2018. This standard changed the timing of recognizing initial franchise fees from being recognized upon receipt to being recognized evenly over the franchise term (generally 20 years). The company expects this change to negatively impact 2018 franchised revenues and margins by approximately $50 million, with a $10 million impact recorded in the third quarter.

McDonald's continues to prioritize returning capital to shareholders. In the third quarter of 2018, the company returned $1.7 billion through share repurchases and dividends, bringing the total for the first nine months of the year to $6.6 billion. The company has also increased its target for shareholder returns to approximately $25 billion for the three-year period ending 2019.