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McDonald's (MCD) Tops Q3 Earnings on Solid Comps Growth

McDonald's Corp. MCD posted mixed results in the third quarter of 2017, wherein though the bottom line outpaced the Zacks Consensus Estimate, the top line lagged the same.

Earnings and Revenue Discussion

Adjusted earnings per share (EPS) of $1.76 surpassed the Zacks Consensus Estimate of $1.75 by 0.6% and improved 9% from the year-ago quarter. The upside reflects stronger operating performance and G&A savings. Notably, adjusted earnings exclude the impact of current-year non-recurring gains and these unrelated strategic charges.

Meanwhile, foreign currency translation had a negative impact of 2 cents per share on earnings in the quarter. At constant currency, earnings grew 7% year over year.

Revenues of $5.75 billion declined 10% year over year, mainly due to the impact of the company’s strategic refranchising initiative. At constant currency, the figure declined 12%. Moreover, the same lagged the Zacks Consensus Estimate of $5.80 billion by nearly 1%.

Behind the Headlines Numbers

In the quarter, revenues at company-operated restaurants declined 23% to $3.06 billion. However, the same at franchise-operated restaurants increased 10% to $2.69 billion.

Global comps grew 6%, supported by positive guest counts across all the segments. This marked the ninth consecutive quarter of positive comparable sales. Meanwhile, comps growth was slightly lower than the last quarter’s increase of 6.6%.

Segment Details

Effective Jul 1, 2015, McDonald's began reporting results under four segments: U.S. (the company's largest segment), International Lead Markets (mature markets including Australia, Canada, France, Germany and the U.K.), High-Growth Markets (markets that have high restaurant expansion and franchising potential such as China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands) and Foundational Markets (the remaining markets in McDonald's system).

U.S.: Comps grew 4.1% in the third quarter owing to the positive impact of the national beverage and McPick 2 value promotions and the continued success of the Signature Crafted premium sandwich platform. Markedly, this segment continues to build momentum as it executes strategic menu, value and convenience initiatives to attract customers. In fact, comps growth was better than the prior quarter rise of 3.9%.

Segment operating income also increased 6% on the back of higher sales-driven franchised margin dollars and G&A savings.

International Lead Markets: Comps at this segment grew 5.7%, lower than the 6.3% rise witnessed in the last quarter. Continued momentum in the U.K. and Canada along with upbeat results across all other markets drove comps.

Operating income was up 21%, including the impact of foreign currency translation. At constant currency, the figure was up 17%, primarily on the back of sales-driven improvements in franchised margin dollars.

High-Growth Markets: Comps grew 6.2%, slightly lower than the prior-quarter’s 7% increase, led by strong performance in China as well as positive results across majority of the segment.

Markedly, the segment's operating income for the quarter included a gain of roughly $850 million associated to the refranchising of China and Hong Kong, partially offset by unrelated non-cash impairment charges. Excluding these items, the segment's operating income rose 7% (3% in constant currencies), reflecting higher sales-driven margin dollars.

Foundational Markets: Comps in Foundational Markets grew 10.2% on the back of positive sales performance across all geographic regions. However, the figure came in lower than the 13% growth recorded in the last quarter.

Meanwhile, operating income declined due to the company's refranchising initiatives and elevated restaurant technology spending, somewhat offset by the benefit from prior year's strategic charges comparison.

McDonald's Corporation Price, Consensus and EPS Surprise

 

McDonald's Corporation Price, Consensus and EPS Surprise | McDonald's Corporation Quote

Zacks Rank & Upcoming Releases

McDonald’s has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other firms in the restaurant space, BJ's Restaurants, Inc. BJRI, Dunkin' Brands Group, Inc. DNKN and Restaurant Brands International Inc. QSR are expected to release their third-quarter numbers on Oct 26. The Zacks Consensus Estimate for the quarter’s earnings is pegged at 25 cents, 63 cents and 49 cents for BJ's Restaurants, Dunkin' Brands and Restaurant Brands, respectively.

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