McDonald’s Beats Consensus, Will EOTF Push US Growth?

McDonald’s (NYSE: MCD), the American fast food company, announced its Q1 2019 results on April 30, 2019, followed by a conference call with analysts. The company beat consensus for revenue which was recorded at $5 billion, down by 3.6% y-o-y. The revenue decrease was largely the impact of the Company’s strategic re-franchising initiative offset by increase in Global comparable sales by 5.4%. The earnings were in line with consensus and was recorded at $1.72, in line with $1.72 per share in the same period of 2018.

McDonald’s reported $21 billion in Total Revenues in 2018. This included 4 revenue streams:

• US Revenue: $7.7 billion in 2018 (36.5% of Total Revenues). This includes sales income and royalty income from Company Operated and Franchised Restaurants respectively from the US.
• International Lead Markets Revenue: $7.6 billion in 2018 (36.1% of Total Revenues). This includes sales income and royalty income from Company Operated and Franchised Restaurants respectively from established markets like Australia, Canada, France, Germany, the U.K. and related markets.
• High Growth Markets Revenue: $4 billion in 2018 (19% of Total Revenues). This includes sales income and royalty income from Company Operated and Franchised Restaurants respectively from high potential markets like China, Italy, Korea, Netherlands, Poland, Russia, Spain, Switzerland, and related markets.
• Foundation Markets and Corporate Revenue: $1.7 billion in 2018 (8.4% of Total Revenues). This includes sales income and royalty income from Company Operated and Franchised Restaurants from remaining part of the world which is largely under the franchise system.

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 past few quarters. 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 the revenue was $5 billion, down 3.6% y-o-y as the company’s re-franchising initiative continues.
• In 2019 we expect the US growth to be driven by “Experience of the Future” (EOTF) as the company is converting US restaurants to inculcate the experience. In Q1 2019, 400 more restaurants were converted to EOTF which takes the number to 8,000 (around 60% of US restaurants) and 2,000 more are expected to be completed by the end of 2019.

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 the same trend continued as Total Expenses came down to $3.6 billion, down 3.6% y-o-y.
• 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 as the company continues its addition of restaurants and also increases average revenue per restaurant. 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 based on the expectation of growth in revenue and earnings as they continue with the re-franchising, and an increase in average revenue per store. EOTF is also expected to boost comparable sales in the US region.

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