10-QPeriod: Q1 FY2019

MCDONALDS CORP Quarterly Report for Q1 Ended Mar 31, 2019

Filed May 8, 2019For Securities:MCD

Summary

McDonald's Corporation reported its first-quarter 2019 financial results, showing a slight decrease in consolidated revenues to $4.96 billion, down 4% year-over-year, though constant currency revenues increased by 2%. This revenue dip was primarily attributed to the ongoing strategic refranchising initiative, which shifts revenue from Company-operated restaurants to franchised revenues. Despite the top-line decrease in reported terms, the company achieved a global comparable sales growth of 5.4%, marking the fifteenth consecutive quarter of positive comparable sales. Net income stood at $1.33 billion, a decrease of 3% from the prior year, with diluted earnings per share remaining flat at $1.72. The company continued to return capital to shareholders, repurchasing approximately $964 million in stock and paying out $887 million in dividends during the quarter, as part of its broader plan to return $9 billion to shareholders in 2019.

Financial Highlights

50 data points
Beta

Revenue

$5.02B

89.4% Gross Margin

Net Income

$1.33B

26.4% Net Margin

EPS (Diluted)

$1.72

Total Assets

$46.47B

Cash & Equivalents

$2.29B

Free Cash Flow

$1.51B

Financial Statements
Beta
Revenue$5.02B
Cost of Revenue$533.10M
Gross Profit$4.49B
SG&A Expenses$499.10M
Operating Expenses$2.93B
Operating Income$2.09B
Interest Expense$274.10M
Net Income$1.33B
EPS (Basic)$1.74
EPS (Diluted)$1.72
Shares Outstanding (Basic)764.90M
Shares Outstanding (Diluted)771.60M

Key Highlights

  • 1Global comparable sales increased by 5.4% in Q1 2019, indicating sustained customer traffic and demand.
  • 2Consolidated revenues decreased by 4% to $4.96 billion, impacted by the strategic refranchising of Company-operated restaurants.
  • 3Net income decreased by 3% to $1.33 billion, while diluted EPS remained flat at $1.72.
  • 4The company returned $1.9 billion to shareholders through share repurchases and dividends in the quarter.
  • 5International Operated Markets showed strong comparable sales growth of 6.0%, driven by the UK and France.
  • 6The adoption of new lease accounting standards (ASC 842) resulted in the recognition of a significant lease right-of-use asset and lease liability on the balance sheet, though it had a non-cash impact on the income statement.
  • 7McDonald's continues to invest in its Velocity Growth Plan, focusing on 'Experience of the Future' modernization, digital initiatives (including the acquisition of Dynamic Yield), and delivery expansion.

Frequently Asked Questions

The decrease in consolidated revenues is primarily due to McDonald's strategic refranchising initiative. This initiative involves selling Company-operated restaurants to franchisees, which shifts revenue from direct sales to the more stable, albeit lower on a consolidated basis, fee-based revenues (rent and royalties) from franchised restaurants.

The adoption of ASC 842 on January 1, 2019, led to the recognition of a significant 'Lease right-of-use asset' and 'Lease liability' on the balance sheet, totaling approximately $12.5 billion. However, this accounting change is primarily non-cash and did not materially impact the Consolidated Statement of Income or cash flows in the short term. It did, however, affect the presentation of franchised margin percentages due to how sub-lease income and lease expense are now recognized.

For the full year 2019, McDonald's anticipates Systemwide sales growth of approximately 1% from net restaurant additions (in constant currencies). They expect commodity costs to rise 2-3% in the U.S. and 2% in key international markets. Selling, general, and administrative expenses are expected to be flat in constant currencies, with reinvestment in technology like Dynamic Yield. Interest expense is projected to increase by 15-17%. The company plans to return about $9 billion to shareholders in 2019, completing its $25 billion three-year target.

McDonald's is actively investing in its 'Velocity Growth Plan,' which includes 'Experience of the Future' (EOTF) modernization of restaurants, digital enhancements (like mobile ordering, self-order kiosks, and the acquisition of Dynamic Yield for personalization), and expanding its delivery service, which offers significantly higher average checks. These initiatives are designed to improve customer experience, convenience, and overall sales.