As sales continue to rise, this fast food giant has had a decline in revenue as it sells outlets to franchisees.
The company continues to spur growth by adapting to changing consumer tastes—such as using fresh beef instead of frozen patties—and upgrading its restaurants. In the latest quarter, this stock’s biggest sales increases came from its overseas operations. The company maintains a strong balance sheet, and has raised its dividend every year since 1976.
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MCDONALD’S CORP. (New York symbol MCD; www.mcdonalds.com) is the world’s largest operator of fast-food restaurants, with over 37,000 outlets in 120 countries. It serves a wide variety of food, but is best known for its hamburgers and french fries.
McDonald’s sales fell 18.8%, from $28.1 billion in 2013 to $22.8 billion in 2017. That’s largely because it continued to sell company-owned stores to franchisees, with the goal of raising franchisees’ ownership from 92% to 95%.
Overall earnings also declined 18.9%, from $5.6 billion in 2013 to $4.5 billion in 2015. McDonald’s is an active buyer of its own shares, so per-share earnings fell at a slower rate of 13.5%, from $5.55 to $4.80.
Earnings then improved to $5.44 a share (or a total of $4.7 billion) in 2016, and rose again to $6.37 a share (or $5.2 billion) in 2017. The higher earnings are partly because the refranchising plan has lowered the company’s operating expenses, and freed it from maintaining and upgrading these outlets. McDonald’s also recently sold 80% of its 2,700-plus restaurants in China to a group led by a state-owned firm for an $850 million gain.
In the quarter ended September 30, 2018, the company’s revenue fell 6.7%, to $5.37 billion from $5.75 billion a year earlier. That’s mainly because it continues the process of selling sell company-owned stores to franchisees; they now own and operate roughly 95% of its restaurants.
However, comparable store sales improved 4.2%. Most of that gain came from McDonald’s overseas operations: same-store sales at its International Lead markets (including the U.K., France and Australia) gained 5.4%; High Growth markets (including the Netherlands, Italy and China) rose 4.6%; and Foundational markets (including Japan) improved 6.0%.
U.S. operations (36% of total sales) saw comparable sales rise 2.4% thanks to higher selling prices. Continuing upgrades to restaurants, including modern seating areas, digital self-order kiosks and table service, have also spurred customer traffic.
Overall earnings in the quarter fell 13.3%, to $1.6 billion from $1.9 billion a year earlier. Due to fewer shares outstanding, per-share earnings declined 9.4%, to $2.10 from $2.32. If you exclude unusual items, earnings per share improved to $2.66 in the latest quarter.
Blue Chip Stocks: Home delivery customers spend more per order than walk-ups
A key part of the company’s recent success is its ability to adjust its menu, particularly as consumers shift toward more healthful foods.
As part of that plan, McDonald’s now uses fresh beef for its Quarter Pounder and other premium burgers. That replaces frozen patties.
McDonald’s is spending $6 billion over two years to update most of its U.S. restaurants. The company also aims to spur its growth with home delivery. On average, McDonald’s home delivery customers spend more per order than walk-in customers. So far, over 13,000 of the company’s outlets now offer delivery.
At the same time, McDonald’s continues to reduce its operating costs by cutting management layers at its U.S. operations. That should make it easier for the company to respond to changing consumer tastes in certain regions and to speed up the launch of new McDonald’s menu items. Under the plan, the company expects to pay between $80 million and $90 million in severance costs and other related charges. However, those moves, along with previously announced restructuring, will help it cut $500 million from its annual expenses by the end of 2019.
McDonald’s sound balance sheet will let it continue to improve its operations. Its long-term debt of $31.8 billion (as of September 30, 2018) is a moderate 22% of its market cap. It also held cash of $2.5 billion.
The company’s earnings in 2018 should improve to $7.76 a share. The stock trades at 23.4 times that estimate, which is reasonable for a company that is a global leader in its field.
McDonald’s has also raised its dividend each year since 1976. The company’s dividend has now grown an average of 7.4% annually over the last 5 years. The current annual rate of $4.64 yields 2.6%.
Recommendation in Wall Street Stock Forecaster: McDonald’s is a buy.
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