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McDonald's - sales and profits beat expectations

William Ryder, Equity Analyst | 30 April 2021 | A A A
McDonald's - sales and profits beat expectations

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McDonalds Corporation Com Stock US0.01

Sell: 231.67 | Buy: 231.68 | Change 1.95 (0.85%)
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Overall revenue was up 5% on a constant currency basis to $5.1bn, slightly above expectations. That was split between franchised restaurants (56.1%) and company owned locations (42.2%). Some revenue growth is attributable to lower than normal 2020 sales due to Covid. Compared to the same period in 2019, revenue was up 2%.

Profits for the first quarter beat expectations and rose 35% to $1.5bn, helped by a strong performance in the US as well the sale of McDonald's Japan stock.

McDonalds expects full-year sales growth in the mid-teens with operating margins in the low-to-mid 40% range. Higher employee incentive pay is seen increasing selling, general and administrative expenses to roughly 2.4% of total sales.

The group paid a dividend of $1.29 per share during the first quarter.

The shares were flat in pre-market trading.

View the latest McDonald's share price and how to deal

Our View

Global lockdowns and social distancing restrictions make the dining industry a very tricky place to be.

But so far McDonald's has fared better than many. The group used the opportunity to build out its digital presence and delivery options, a strategy that has boosted sales in the US. That's allowed many of the restaurants to continue operating despite indoor dining restrictions--though many markets are still struggling under the weight of the pandemic. A business model that looks more like a property company than a restaurant chain - owning most of its buildings and franchisees running the restaurants - has also provided some protection on the cost side.

McDonald's is less insulated from the operating costs of its franchisees than first glance might suggest, though. 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. Most of this is has already been repaid. But with Covid resurfacing with force in India, it's impossible to tell how long restrictions around the world will last. There's a risk that McDonald's may have to offer more support in some markets in the months ahead.

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.

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. We'd like to hear a bit more on the new overall growth strategy though - "Accelerating the Arches" - of which the increased digitisation plays a big part. But platitudes like "our brand will become a growth driver in its own right" don't give us much to work with. McDonald's enviable intellectual property means growth potential is huge - but we'll reserve final judgement until we have more information.

It appears the worst of the pandemic is over for McDonald's. The near-term question now is how much longer it will have to balance off patchy sales weakness due to on-and-off restrictions in some of its markets. A price to earnings ratio some way above the average means the share price probably won't forgive any unexpected flare-ups.

McDonald's key facts

  • Price/Earnings ratio: 26.7
  • 10 year average Price/Earnings ratio: 20.2
  • Prospective dividend yield (next 12 months): 2.3%

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.

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First Quarter Results

Overall comparable sales also benefitted from Covid's impact on 2020 figures and rose 7.5%. Lower customer numbers were somewhat offset by more expensive orders.

Comparable sales in the US (39.8% of revenue) were up 13.6% as delivery and online orders rose and the cost of each order increased. Restaurant operating profits rose 21% to $1.3bn, driven primarily by franchised restaurants.

International Operated Markets (49.3% of revenue) saw comparable sales rise 0.6%. That reflected a strong performance in the UK, Australia and Canada, but negative comparable sales in France and Germany. Weakness in France and Germany led to a 1% decline in restaurant operating profits. Several markets in this category are still under pressure from Covid restrictions.

Strong growth in China and Japan saw comparable sales for International Developmental Licensed Markets (9.3% of revenue) rise 6.4%.

This year, the group expects around 650 net restaurant additions.

View the latest McDonald's share price and how to deal

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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.