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

McDonald's MCD posted robust results in the third quarter of 2016, wherein both the bottom line and the top line outpaced the Zacks Consensus Estimate.

Earnings and Revenue Discussion

Earnings per share (EPS) of $1.62 surpassed the Zacks Consensus Estimate of $1.48 by 9.5% and improved 15.7% from the year-ago quarter. The upside can be attributed to the turnaround plan announced by CEO Steve Easterbrook in May 2015.

 

Meanwhile, foreign currency translation had a negative impact of 3 cents per share on earnings in the quarter. Notably, at constant currency, earnings grew 17% year over year.

Revenues of $6.42 billion fell 3% year over year mainly due to the impact of refranchising and currency headwinds. At constant currency, the figure declined 1%. Revenues, however, surpassed the Zacks Consensus Estimate of $6.29 billion by 2.1%.

Behind the Headlines Numbers

In the quarter, revenues at company-operated restaurants declined 7.3% to $3.97 billion. Revenues at franchise-operated restaurants, however, grew 5.1% to $2.45 billion.

Global comps grew 3.5%, supported by positive comps across all the segments, marking the fifth consecutive quarter of positive comparable sales. Moreover, comps compared favorably with last quarter’s increase of 3.1%.

MCDONALDS CORP Price, Consensus and EPS Surprise

 

MCDONALDS CORP Price, Consensus and EPS Surprise | MCDONALDS CORP Quote

Segment Details

Effective Jul 1, 2015, the company 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 1.3% in the third quarter, reflecting the success of the All Day Breakfast platform launched in 2015 and the popularity of the company’s national value platform – McPick 2. The introduction of Chicken McNuggets with no artificial preservatives also boosted the segment’s performance. However, comps growth was less than the prior-quarter improvement of 1.8% due to softening industry growth.

Segment operating income jumped 8%, mainly driven by improved restaurant profitability and higher gains from refranchising.

Going forward, the company will remain focused on expanding its All Day Breakfast menu, the quality of food and on enhancing guest experience.

International Lead Markets: Comps at the International Lead Markets segment grew 3.3%, driven by strong performance in the U.K. and upbeat results in Australia, Canada and Germany. The upside reflects multiple menu, service and value initiatives across most of the markets, which led to positive consumer response. Moreover, comps were better than an increase of 2.6% recorded last quarter.

Operating income was up 2%, including the impact of foreign exchange headwinds. At constant currency, the figure was up 5% on the back of sales-driven improvements in franchised margin dollars across most markets.

High-Growth Markets: Comps grew 1.5% in High-Growth Markets, as positive performance in almost all markets was partially offset by negative comparable sales in China due in part to temporary protests concerning events surrounding the South China Sea and strong prior-year comparisons. Notably, comps had witnessed growth of 1.6% last quarter.

The segment's operating income rose 8% (10% in constant currencies) fueled by improved restaurant profitability in China, which benefited from the recent VAT reform.

Foundational Markets: Comps in Foundational Markets jumped 10.1% primarily on the back of strong sales in Japan along with solid results in each of the segment's geographic regions. Moreover, the figure compared favorably with comps growth of 7.7% last quarter.

Operating income in the quarter declined due to the impact of strategic charges associated with the company's ongoing refranchising and G&A initiatives.

Zacks Rank & Stocks to Consider

McDonald’s has a Zacks Rank #4 (Sell). Better-ranked stocks in this sector include Wingstop Inc. WING, Darden Restaurants, Inc. DRI and The Wendy's Company WEN. While Wingstop sports a Zacks Rank #1 (Strong Buy), Darden and Wendy's carry a Zacks Rank #2 (Buy) each. You can see the complete list of today’s Zacks #1 Rank stocks here.

Wingstop posted positive earnings surprises in all of the last four quarters, with an average beat of 15.46%. Further, for full-year 2016, EPS is expected to grow 18.1%.

The Zacks Consensus Estimate for Darden’s 2016 earnings climbed 1.3% over the last 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 9.32%.

Wendy’s earnings surpassed the Zacks Consensus Estimate in all of the last four quarters, with an average beat of 29.01%. Further, for full-year 2016, EPS is expected to grow 21.2%.

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