Third quarter global like-for-like sales fell 2.2%, and revenue fell 2% to $5.4bn. That reflects weak sales performances in non-US markets, as a result of COVID-19. This was partially offset by positive trends within the US.
Operating income rose 3% to $2.5bn, but excluding gains from the sale of McDonald's Japan stock, operating income fell 2%. Operating margins of 46.6% were much better than the market had expected.
The group said it "began the third quarter with nearly all restaurants globally open for business, and which currently remain open". However, since September, there has been an increase in government restrictions impacting markets outside the US. These include reduced operating hours and dine-in capacity, as well as some closures.
A quarterly dividend of $1.29 per share was announced.
The shares rose 4.8% in pre-market trading.
Global lockdowns and social distancing restrictions make the dining industry a very tricky place to be.
But so far McDonalds' has fared better than many. A system of drive-thrus, digital service options and natural inclination towards takeaway food have allowed most franchisees to keep trading, albeit in smaller quantities. A business model that looks more like a property company than a restaurant chain - owning most of its buildings and franchisees running the restaurants - also provides some protection on the cost side.
While service is disrupted, knocking revenues for both the franchised restaurants' and McDonald's itself, it's the franchisees who are on the hook for most of the restaurant operating costs. In recent years this has been good news for operating margins and profits, with higher sales spread over a relatively fixed cost base. Sadly the opposite's also true - when sales shrink it has a disproportionate effect on profits.
In reality, McDonald's is also less insulated from the operating costs of its franchisees than first glance might suggest. The group's forked out $1bn to help embattled franchisees stay afloat. That aid is mostly coming in the form of deferred royalty and rent payments. However, it's still booking the revenues now. So far about half of this sum has been collected, and the rest is expected to come back in time. We're encouraged by the reduction in bad debt revisions, and it makes good business sense to ensure franchised restaurants stay in business. But with the duration and severity of successive waves of coronavirus unknown at this point, there's a risk some of this cash never makes it back to McDonald's.
With earnings uncertain, the balance sheet comes into play. McDonald's net debt is a bit higher than we'd like, but not unmanageable as things stand. Especially because the group has access to substantial amounts of cash and credit.
Looking to the future the McDonald's brand remains a force to be reckoned with. And a steadfast focus on "experience of the future" (read: the increased digitisation of its stores and capabilities), can only be a good thing as we learn to live in a hospitality sector that's likely been changed forever.
The question now is how new restrictions in markets including France, Germany, Canada and the UK are expected to impact the final quarter. A price to earnings ratio some way above the average means the share price won't be very forgiving of any unwelcome surprises.
McDonald's key facts
- Price/Earnings ratio: 27.3
- 10 year average Price/Earnings ratio: 19.7
- Prospective dividend yield (next 12 months): 2.5%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Third Quarter Results
The US saw comparable sales rise 4.6%, with larger order sizes offsetting a lower number of guests. Sales were also helped by successful marketing and promotional efforts. Total revenues rose 3% to $2.1bn, driven by the group's franchised businesses.
Despite improvements in the quarter, International Operated Markets comparable sales fell 4.4% thanks to subdued customer sentiment and government restrictions. Performance was negative in France, Spain, Germany and the UK. Revenue declined 6% to $2.8bn, with mid-single digit falls in company-operated and franchised restaurants.
In the International Developmental Licenced market (where the McDonald's brand is licenced to third parties) saw overall revenue fall 1% to $462.4m. Comparable sales were down more dramatically (10.1%), because of weak performances in China and Latin America.
In total, sales from company operated restaurants fell 5% to $2.3bn, while revenue from franchised sites fell 1% to $3.0bn. As at the end of September, 93% of the group's restaurants were franchised.
Operating costs declined 7% to $2.9bn, largely thanks to a decline in costs associated with company operated restaurants. That's a function of McDonalds' operating model: franchised restaurants have a higher proportion of fixed costs, but the operated venues have a more flexible cost base.
There was a net reduction in the group's bad debt reserves of $27m. These reserves relate to rent and franchisee royalty deferrals in Q1 and Q2, as a result of coronavirus. In total, about $1bn worth of cash payments were deferred and around half of these had been paid by the end of September. An additional $40m was deferred in the third quarter. The group said: "The extent of the remaining deferrals differs in length by market, with more than half of the amount expected to be collected in the fourth quarter of 2020 and the remaining amounts expected to be collected in the first and second quarters of 2021".
Capital expenditure for the year will be around $1.6bn, with $850m earmarked for the US business. Around 950 restaurants will open globally, which after closures will result in a net addition of around 300 sites.
Net debt stands at $34.1bn, compared to $33.3bn at the start of the year.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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