McDonald’s (NYSE:MCD) reported its Q1 earnings on April 20 with the U.S. net revenues for the quarter rising 7% to $2.54 billion supported by strong performance in the U.S. and new restaurant additions. Net income grew 4.8% to $1.26 billion. McDonald’s competes with Yum! Brands (NYSE:YUM), Subway, Starbucks (NASDAQ:SBUX), Wendy’s (NYSE:WEN), Chipotle Mexican Grill (NYSE:CMG), among many others.
We have a Trefis price estimate of $99 for McDonald’s, which is about 4% above the current market price.
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U.S. Leads the Pack
The company’s top-line growth in the U.S. was helped by strong comparable sales growth of 8.9% for the quarter ended March 31. McDonald’s has been able to increase its U.S. sales due to many factors including new product introductions such as Chicken McBites, Fruit & Nut Oatmeal, etc., refurbishing existing restaurants to make them appear more upscale, and extending the timing of its outlets to increase footfalls. More than 89% of McDonald’s outlets in the U.S. open by 5 a.m and 40% of them are open 24/7.
The comparable sales for Europe could only manage a 5% growth for the quarter in spite of a modest increase in the menu prices in 2011. The corresponding figure for Asia/Pacific was 5.5%.
Franchised Margins To Improve
The company-operated margins for franchised restaurants witnessed a slight increase aided by healthy comparable sales growth. Since McDonald’s typically takes a cut (as a percentage of sales) from its franchised restaurants, any growth in the comparable sales leads to revenue addition for the company. Moreover, since the costs incurred by McDonald’s on its franchised restaurants are more or less fixed, the incremental revenue addition leads to higher margins.
The company is also benefiting from its increased presence in Asia-Pacific. The operating margins for franchised restaurants are highest for Asia-Pacific and, thus, a greater proportion of restaurants in this region tend to bring in higher overall margins for the company.
McDonald’s plans to add 1,300 new restaurants in 2012 with greater focus on the Asia-Pacific region. This includes the addition of 200-250 restaurants in China alone.