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McDonald’s in 2Q15: Financial Highlights and Management Guidance

Adam Jones

How to Interpret McDonald’s Mixed 2Q15 Results

(Continued from Prior Part)

How the market reacted

Following McDonald’s earnings release, shares didn’t move much, closing 0.5% lower at $97.09 from the previous day’s close of $97.58.

Much of the second-quarter earnings call was a reiteration of the turnaround plan announced on May 4, 2015. With the effects of this plan yet to take take shape, McDonald’s (MCD) continues to struggle in its key markets.

Key 2Q15 financial highlights

  • Revenue came in at $6.5 billion, beating analysts’ estimate of $6.4 billion but declining by 9.5% year-over-year.

  • Operating income declined to $1.8 billion, which is down 6% year-over-year on a constant-currency basis. Constant currency means the impact of foreign currency is excluded.

  • The company’s operating margin came in at $665 million. This is an 8% decline year-over-year, on a constant-currency basis.

  • The tax rate for the quarter was 29.8%.

  • Net income declined to $1.2 billion from $1.39 billion in the corresponding quarter a year ago.

  • During 2Q15, foreign exchange negatively impacted EPS by $0.13.

  • During the quarter, the company returned $2.5 billion to shareholders in the form of dividends and share repurchases.

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Cost pressures

Food costs increased by 1% as a result of higher beef prices. Beef prices are expected to remain elevated throughout the rest of 2015. To learn more about this, read Why Falling Commodity Prices Are Good for Restaurants.

To offset the cost increase, McDonald’s increased its menu prices by 2% during the quarter. The company usually tracks the food-away-from-home inflation rate, which was 3% in the quarter. On a full-year basis, food-away-from-home is expected to increase by 2% to 3%, according to the company. This suggests the company may hike prices further.

Companies such as Wendy’s (WEN), Yum! Brands (YUM), and Brinker International (EAT) will also face these cost pressures. You could look at the Consumer Discretionary Select Sector SPDR (XLY) if you’re considering investing in the industry. XLY has 4% exposure to MCD in its portfolio.

Guidance

  • The company expects global comps to turn positive in the third quarter.

  • The China market is expected to return to normal in terms of performance next quarter (3Q15).

  • The company’s operating margins are expected to decline by 2% in fiscal 2015. This is a result of increased labor costs resulting from minimum wage increases, paid time off, and the provision of educational assistance.

  • The tax rate for the year is expected to be in the range of 31% to 33%.

  • Currency fluctuations are expected to have a negative impact amounting to $0.14 to $0.16 in 3Q15 and $0.45 in the full year.

  • The company reiterated its plan to return $8 billion to $9 billion to investors in the form of dividends and share repurchases.

McDonald’s third-quarter earnings will be critical for investors, as these will reflect the first full quarter under the new management structure.

For more updates on restaurants, visit our Restaurants industry page.

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