Will Re-Franchising Continue To Push Earnings Growth In Q1 2019 For McDonald’s?

McDonald’s (NYSE: MCD), the American fast food company, is set to announce its Q1 2019 results on April 30, 2019, followed by a conference call with analysts. The market expects the company to report revenue close to $4.9 billion in Q1 2019, which would be a decrease of 4.1% on a year-on-year basis. The decrease is mainly expected with the continuous re-franchising of the restaurants. Market expectation is for the company to report earnings of $1.76 per share in Q1 2019, slightly lower than $1.79 per share in the year-ago period.

We have summarized our key expectations from the earnings announcement in our interactive dashboard – What Has Driven McDonald’s Revenues & Expenses Over Recent Quarters, And What Can We Expect For Full Year 2019?  In addition, here is more Consumer Discretionary data.

Key Factors Affecting Earnings:

Revenue to be affected:

• McDonald’s is seeing a continuous fall in revenue over the quarters in the last 2 years. This is because McDonald’s is focusing a lot on re-franchising plans to have 95% of Total restaurants as franchised. (92.7% at the end of FY 2018) In Q1 2019 we expect a fall in revenue (year on year) as the company’s re-franchising plans continue.
• US leads the contribution to Total Revenue for the group at 36.5% in 2018. Trefis estimates the segment to contribute $8.1 billion in 2019 as the new restaurants gets added and new franchises open.
• International Lead market was a close second in the contribution to Total Revenue for the group at 36.1% in 2018. Trefis estimates the segment to contribute $7.8 billion in 2019 as average check goes higher and more restaurants get re-franchised.
• High growth markets saw a fall in revenue due to a fall in Average revenue of company operated restaurants. Trefis estimates the segment will contribute $4 billion to Total Revenue in 2019 as more restaurants get added and many re-franchised.
• The segment has seen a drop in revenue as re-franchising continues. Trefis estimates the segment to contribute $1.7 billion to Total Revenue in 2019 as more restaurants get added and many are re-franchised.

Trend in Expenses:

• As Revenue, Total Expenses have also been falling in the 2018 quarters as compared to 2017. This is because McDonald’s is focusing a lot on re-franchising plans to have 95% of Total restaurants as franchised (92.7% at the end of FY 2018) and thus the expenses of running a Company Operated restaurant have gone down. In Q1 2019 we expect a fall in Total expenses (year on year) as the company’s re-franchising plans continue.
• EBITDA margins are expected to increase due to better operational efficiency and re-franchising.
• Indirect Expenses are expected to be around $5.1 billion.

Full Year Outlook:

• For the full year, we expect gross revenue to increase by 2.4% to $21.5 billion in 2019.
• Growth is expected to be pushed by continuous addition of restaurants and increment in average revenue of restaurants. Trefis estimates 1200+ new restaurants by the end of 2019 (all segments).
• Highest revenue contribution is expected from US segment at $8.1 billion.
• EBITDA margin is expected to continue increasing and will be around 53.6%.

Trefis has a price estimate of $196 per share for McDonald’s stock. The value is backed on the expectation of growth in revenue and earnings as they continue with the re-franchising and increase in average revenue per store.

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