McDonald’s Ends 2017 On A Strong Note, Announces $6 Billion Investment For Transformation

by Trefis Team
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McDonald’s (NYSE:MCD) announced its Q4 and FY 2017 results on January 30, 2018 and the company reported a diluted EPS (earnings per share) of $1.71 (excluding the impact of the Tax Act), higher than consensus estimates of $1.59.  Comparable sales in Q4 2017 increased by 5.5% on the back of increased guest count in all segment. The company ended 2017 with a global comparable sales growth of 5.3%, its best performance in six years.

The charts below summarize McDonald’s comparable sales growth for all the quarters in 2017:

Growth in comparable sales was due to an increase in cash counts as McDonald’s was able to generate repeat traffic. A 4.5% increase in comparable sales in the U.S. is much higher compared to its peers who reported flat comparable sales growth in this quarter.   The company has gained market share in six of its top eight markets primarily the U.K., Canada, and Japan. While comp numbers remain high, Q4 2017 saw a slight decline due to slower growth in the high growth markets segment, attributed to a short term challenge in South Korea.

As the company works aggressively on its refranchising initiative and increases comparable sales, McDonald’s is witnessing a strong growth in operating income, while revenues continue to decline. The below charts summarize the company’s operating performance for Q4 2017 and FY 2017:

You can click here to access these charts and use our interactive model.

Going Forward:

  • By the end of 2017, franchise restaurants accounted for 92% of McDonald’s total restaurant base and 80% of its margin dollars now come from franchisee margins. As the refranchising initiative comes to a close, growth in margins is likely to stabilize.
  • Value meals including the company’s dollar menu aimed at attracting price conscious customers are likely to drive growth in 2018.
  • Innovative menu items such as the recently launched Buttermilk Crispy Tenders in the U.S. will remain the key growth driver for the company.
  • McDonald’s will bring 4,000 additional stores under the “Experience Of The Future” platform in 2018 resulting in half of its U.S. restaurants coming under this platform. These stores with a new design will be better equipped to offer the company’s premium offerings (such as Signature Burgers) and drive growth via a higher ticket size.
  • Over the next two years McDonald’s and its franchisees are likely to invest $6 billion in transforming its U.S. business.
  • The new tax law will impact McDonald’s accounting in 2018, however given its significant business outside the U.S., the overall impact of this change on the company is not likely to be material.
  • The company expects general and administrative expenses to decline by 1% in 2018.

We will be updating our model based on these results and this can lead to a change in our price estimate for the company.

 

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