McDonald’s Bounces Higher On The Back Of Q3’16 Results, Future Uncertain
McDonald’s (NYSE:MCD) stock price saw a 2.6% jump, as it reported its third quarter earnings on 21st October 2016. Although the burger chain posted a decline in revenues, the drop was less than expected by consensus estimates. Further, supported by a $3.4 billion share repurchase program, McDonald’s also beat the consensus on earnings, reporting a 7% y-o-y rise.
The rise in its comparable sales data, especially in the U.S., at 1.3%, was considered a big positive, as is evident by the market’s reaction on the company’s stock price. Further, the turnaround seen in Japan buoyed the company’s segment labeled as Foundational Markets & Corporate higher. It not only saw 10.1% y-o-y rise comparable store sales, but also a 9.3% increase in franchised revenues.
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Keeping with the trend seen for a number of quarters now, McDonald’s revenues suffered a decline in the three months ended September. However, the softening was expected primarily due to the negative impact of refranchising, as the company-operated sales were increasingly replaced by franchised revenues in the form of rent and royalty, based on a percentage of sales. Going forward, we are likely to see this trend sustaining, as the company works on its goal to be 95% franchised by 2018. Most of the refranchising will take place in the company’s key future growth markets: High Growth (consisting of China and Asia Pacific) and Foundational (Japan, India, and other South-East Asian nations).
In terms of bottom-line, the company saw a notable increase in earnings, owing to its efforts at controlling costs. Operating expenses were down approximately 6.5% y-o-y in Q3’16, supported by declining company operated expenses and lower commodity prices. However, the decline in operating expenses was slightly offset by higher expenditure on franchisees occupancy costs. As a result, McDonald’s witnessed a 258 basis points improvement in operating margins.
Going forward, the company will be facing tough comparables as the timings overlap that of the launch of the very popular All Day Breakfast in the fourth quarter of last year. To be sustainable in the long term, McDonald’s is working on projecting its food as healthy and nutritional. It recently completed the transition to chicken not treated with antibiotics, introduced buns that are not rich in fructose corn content, and removed artificial preservatives from its Chicken McNuggets. Further, it is increasingly using digital technology to showcase its tailor-made menu to attract more customers. The company emphasized that its focus is not on quarter to quarter performance but long term sustained growth, indicating that the path towards future growth remains uncertain as of now.
Have more questions on McDonald’s? See the links below.
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