Why did McDonald's earnings decline more than revenue in the second quarter of 2024?

Revenue was flat, but operating income fell 6% and EPS fell 11% on a GAAP basis. The drivers were $97 million of impairment charges tied to the anticipated sale of the South Korea business, $57 million of restructuring charges under Accelerating the Organization, higher SG&A from digital, technology, and transformation investments, higher interest expense, and a higher effective tax rate. Excluding current-year charges, non-GAAP EPS declined 6%.

What is driving the weakness in comparable sales?

In the U.S., comparable sales declined 0.7% because guest counts fell, partly offset by average check growth from menu price increases. International results were pressured by France in the Operated Markets segment, and by the Middle East war and negative comparable sales in China in the Developmental Licensed segment. Growth in Latin America and Japan partly offset these declines.

Did management change its full-year 2024 guidance?

The filing presents the 2024 outlook as 'based on current conditions' and does not describe changes from prior guidance. Management expects net restaurant unit expansion to add nearly 2% to Systemwide sales growth in constant currencies, SG&A of about 2.2% of Systemwide sales, an operating margin in the mid-to-high 40% range, interest expense up 9% to 11%, an effective tax rate of 20% to 22%, and a free cash flow conversion rate near 90%.

How is McDonald's returning cash to shareholders?

During the second quarter, McDonald's paid a dividend of $1.67 per share, totaling $1.2 billion, and repurchased 3.5 million shares for $946 million. Year to date through June 30, dividends totaled $2.4 billion and share repurchases totaled 6.7 million shares, or $1.9 billion.

What is the impact of the Middle East war and the South Korea sale?

The Middle East war has reduced Systemwide sales and revenue, mainly in the International Developmental Licensed Markets & Corporate segment, where most restaurants operate under developmental license or affiliate arrangements. McDonald's expects this to continue while the war persists, though its exposure is limited because it generally invests no capital in these arrangements and earns royalties. The South Korea sale drove $97 million of non-cash impairment charges in the quarter; the filing does not disclose the sale's expected proceeds or timing.

MCD 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed July 29, 2024. Cited figures are marked; the original filing is the authoritative source.

McDonald's reported second-quarter 2024 results that were soft on the top line and weaker on profit.

Consolidated revenues were flat at $6.49 billion^a (up 1% in constant currencies), and global comparable sales fell 1.0%, with declines in the U.S. (-0.7%), International Operated Markets (-1.1%), and International Developmental Licensed Markets (-1.3%). Systemwide sales fell 1% (up 1% in constant currencies). Management attributed the U.S. comparable sales decline to negative guest counts, partly offset by menu price increases.

Weakness in France, negative comparable sales in China, and the ongoing Middle East war weighed on international results. Profitability declined more sharply. Operating income fell 6% to $2.92 billion^b, or 2% excluding $154 million of current-year charges, which mainly comprised non-cash impairments tied to the anticipated sale of the South Korea business and restructuring costs under Accelerating the Organization.

GAAP diluted EPS fell 11% to $2.80^c, and non-GAAP EPS was $2.97, down 6%. Higher SG&A (investments in digital, technology, and transformation) and higher interest expense also pressured results. Management reaffirmed its 2024 outlook, including an operating margin in the mid-to-high 40% range and a free cash flow conversion rate near 90%, while returning capital through $1.2 billion in dividends and $946 million in share repurchases during the quarter.

For investors, the key questions are whether value-driven menu pricing and chicken and loyalty initiatives can restore traffic growth in the U.S. and Europe, and how quickly the International Developmental Licensed segment recovers from the Middle East conflict and China softness. The quarter also highlights rising cost and interest-rate pressure on margins, even as the company continues its unit expansion, with over 1,600 expected net restaurant additions in 2024.

02—Key points

Key Highlights

Consolidated revenues were flat at $6.49 billion (+1% in constant currencies), while global comparable sales declined 1.0%, with negative results in all three segments.
GAAP diluted EPS fell 11% to $2.80; non-GAAP EPS was $2.97, down 6%, after excluding $0.17 per share of current-year charges.
Operating income declined 6% to $2.92 billion (down 2% excluding charges), with $97 million of impairment charges tied to the planned sale of the South Korea business and $57 million of restructuring charges.
U.S. comparable sales fell 0.7% as negative guest counts offset strategic menu price increases; digital and delivery growth were positive contributors.
The International Developmental Licensed Markets segment was hit by the Middle East war and negative comparable sales in China, while France weighed on International Operated Markets.
Interest expense rose 13% in both periods on higher average rates and debt balances; the company expects full-year 2024 interest expense to rise 9% to 11%.
Shareholder returns continued: $1.2 billion in dividends and $946 million in buybacks in Q2, with $1.9 billion repurchased year to date; 2024 outlook calls for a 20% to 22% effective tax rate and $2.5 to $2.7 billion in capex.

03—Questions

Frequently Asked Questions

Why did McDonald's earnings decline more than revenue in the second quarter of 2024?
Revenue was flat, but operating income fell 6% and EPS fell 11% on a GAAP basis. The drivers were $97 million of impairment charges tied to the anticipated sale of the South Korea business, $57 million of restructuring charges under Accelerating the Organization, higher SG&A from digital, technology, and transformation investments, higher interest expense, and a higher effective tax rate. Excluding current-year charges, non-GAAP EPS declined 6%.
What is driving the weakness in comparable sales?
In the U.S., comparable sales declined 0.7% because guest counts fell, partly offset by average check growth from menu price increases. International results were pressured by France in the Operated Markets segment, and by the Middle East war and negative comparable sales in China in the Developmental Licensed segment. Growth in Latin America and Japan partly offset these declines.
Did management change its full-year 2024 guidance?
The filing presents the 2024 outlook as 'based on current conditions' and does not describe changes from prior guidance. Management expects net restaurant unit expansion to add nearly 2% to Systemwide sales growth in constant currencies, SG&A of about 2.2% of Systemwide sales, an operating margin in the mid-to-high 40% range, interest expense up 9% to 11%, an effective tax rate of 20% to 22%, and a free cash flow conversion rate near 90%.
How is McDonald's returning cash to shareholders?
During the second quarter, McDonald's paid a dividend of $1.67 per share, totaling $1.2 billion, and repurchased 3.5 million shares for $946 million. Year to date through June 30, dividends totaled $2.4 billion and share repurchases totaled 6.7 million shares, or $1.9 billion.
What is the impact of the Middle East war and the South Korea sale?
The Middle East war has reduced Systemwide sales and revenue, mainly in the International Developmental Licensed Markets & Corporate segment, where most restaurants operate under developmental license or affiliate arrangements. McDonald's expects this to continue while the war persists, though its exposure is limited because it generally invests no capital in these arrangements and earns royalties. The South Korea sale drove $97 million of non-cash impairment charges in the quarter; the filing does not disclose the sale's expected proceeds or timing.

04—Continue

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