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McDonald’s Corporation (MCD - Free Report) posted weaker-than-expected results in the second quarter of 2016. Though the company recorded positive comps growth across all its segments, it was lower than the preceding quarter due to soft industry growth. Currency headwinds also kept profits under pressure. Shares declined more than 2.5% in pre-market trading after the earnings release.
Earnings and Revenue Discussion
McDonald’s earnings of $1.25 missed the Zacks Consensus Estimate of $1.38 by 9.4% and declined 1% from the year-ago quarter. Foreign currency translation had a negative impact of 2 cents on earnings in the quarter. The decline reflects drop in revenues and lower-than-expected comps.
Meanwhile, in constant currency, it grew 1% year over year. Excluding the impact of strategic charges and prior year restructuring charges, earnings increased 13%. The upside can be attributed to the turnaround plan announced by CEO Steve Easterbrook in May 2015.
Revenues of $6.265 billion fell 4% year over year mainly due to currency headwinds. In constant currency, the figure declined 1%. Revenues also missed the Zacks Consensus Estimate of $6.281 billion by a marginal 0.3%.
In the quarter, revenues at company-operated restaurants declined approximately 8% to $3.917 billion. Revenues at franchise-operated restaurants, however, grew 5% to $2.348 billion.
Global comps grew 3.1%, supported by positive comps across all the segments, marking the fourth consecutive quarter of positive comparable sales. However, it compared unfavorably with last quarter’s increase of 6.2%.
Consolidated operating income was relatively flat at $1.858 billion, which included approximately $230 million of previously announced strategic charges, consisting primarily of non-cash impairment charges related to the company's ongoing refranchising and G&A initiatives, as well as the decision to relocate the company's headquarters. It increased 3% on a constant currency basis.
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 UK), 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.: U.S. comps grew 1.8% in the second 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. However, comps growth was lower than the prior-quarter improvement of 5.4% due to softening industry growth.
Segment operating income jumped 10% driven mainly by higher sales-driven franchised margins and a rise in gains from restaurant refranchising.
The company remains focused on its long-term value platform, menu innovation and simplification of restaurant operations to improve guest experience.
International Lead Markets: Comps at the International Lead Markets segment grew 2.6%, driven by strong performance in Australia, the UK and Canada and improvement in Germany. The upside reflects multiple menu, service and value initiatives across most of the segments, which led to positive consumer response. However, comps were lower than an increase of 5.2% last quarter.
Operating income was up 4%, including the impact of foreign exchange headwinds. In constant currency, the figure was up 7% driven by improved franchised margins.
High-Growth Markets: Comps grew 1.6% in High-Growth Markets, reflecting an impressive performance in Russia and China, along with solid performance across various other markets. However, the figure compared unfavorably with comps growth of 3.6% last quarter.
The segment's operating income rose 25% (32% in constant currencies) fueled by improved results in China.
Foundational Markets: Comps in Foundational Markets jumped 7.7%, primarily on the back of strong sales in Japan and many other markets. However, the figure compared unfavorably with comps growth of 11% 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
Currently, McDonald’s has a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Shake Shack, Inc. (SHAK - Free Report) , Dave & Buster's Entertainment, Inc. (PLAY - Free Report) and Chuy’s Holdings, Inc. (CHUY - Free Report) . While Shake Shack and Dave & Buster’s sport a Zacks Rank #1 (Strong Buy), Chuy’s Holdings carries a Zacks Rank #2 (Buy).
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McDonald's (MCD) Lags Q2 Earnings Estimates, Stock Falls
McDonald’s Corporation (MCD - Free Report) posted weaker-than-expected results in the second quarter of 2016. Though the company recorded positive comps growth across all its segments, it was lower than the preceding quarter due to soft industry growth. Currency headwinds also kept profits under pressure. Shares declined more than 2.5% in pre-market trading after the earnings release.
Earnings and Revenue Discussion
McDonald’s earnings of $1.25 missed the Zacks Consensus Estimate of $1.38 by 9.4% and declined 1% from the year-ago quarter. Foreign currency translation had a negative impact of 2 cents on earnings in the quarter. The decline reflects drop in revenues and lower-than-expected comps.
Meanwhile, in constant currency, it grew 1% year over year. Excluding the impact of strategic charges and prior year restructuring charges, earnings increased 13%. The upside can be attributed to the turnaround plan announced by CEO Steve Easterbrook in May 2015.
Revenues of $6.265 billion fell 4% year over year mainly due to currency headwinds. In constant currency, the figure declined 1%. Revenues also missed the Zacks Consensus Estimate of $6.281 billion by a marginal 0.3%.
MCDONALDS CORP Price and Consensus
MCDONALDS CORP Price and Consensus | MCDONALDS CORP Quote
Behind the Headlines Numbers
In the quarter, revenues at company-operated restaurants declined approximately 8% to $3.917 billion. Revenues at franchise-operated restaurants, however, grew 5% to $2.348 billion.
Global comps grew 3.1%, supported by positive comps across all the segments, marking the fourth consecutive quarter of positive comparable sales. However, it compared unfavorably with last quarter’s increase of 6.2%.
Consolidated operating income was relatively flat at $1.858 billion, which included approximately $230 million of previously announced strategic charges, consisting primarily of non-cash impairment charges related to the company's ongoing refranchising and G&A initiatives, as well as the decision to relocate the company's headquarters. It increased 3% on a constant currency basis.
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 UK), 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.: U.S. comps grew 1.8% in the second 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. However, comps growth was lower than the prior-quarter improvement of 5.4% due to softening industry growth.
Segment operating income jumped 10% driven mainly by higher sales-driven franchised margins and a rise in gains from restaurant refranchising.
The company remains focused on its long-term value platform, menu innovation and simplification of restaurant operations to improve guest experience.
International Lead Markets: Comps at the International Lead Markets segment grew 2.6%, driven by strong performance in Australia, the UK and Canada and improvement in Germany. The upside reflects multiple menu, service and value initiatives across most of the segments, which led to positive consumer response. However, comps were lower than an increase of 5.2% last quarter.
Operating income was up 4%, including the impact of foreign exchange headwinds. In constant currency, the figure was up 7% driven by improved franchised margins.
High-Growth Markets: Comps grew 1.6% in High-Growth Markets, reflecting an impressive performance in Russia and China, along with solid performance across various other markets. However, the figure compared unfavorably with comps growth of 3.6% last quarter.
The segment's operating income rose 25% (32% in constant currencies) fueled by improved results in China.
Foundational Markets: Comps in Foundational Markets jumped 7.7%, primarily on the back of strong sales in Japan and many other markets. However, the figure compared unfavorably with comps growth of 11% 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
Currently, McDonald’s has a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include Shake Shack, Inc. (SHAK - Free Report) , Dave & Buster's Entertainment, Inc. (PLAY - Free Report) and Chuy’s Holdings, Inc. (CHUY - Free Report) . While Shake Shack and Dave & Buster’s sport a Zacks Rank #1 (Strong Buy), Chuy’s Holdings carries a Zacks Rank #2 (Buy).
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