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McDonald's - Strong end to 2022, more openings on the table

Fourth quarter comparable sales rose 12.6%, reflecting double digit growth in all segments.

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Fourth quarter comparable sales rose 12.6%, reflecting double digit growth in all segments.

In its home territory in the US, sales growth was driven by price increases, higher footfall and successful marketing initiatives. The strongest growth was in International Developmental Licensed Markets, despite a fall in comparable sales in China due to COVID-19 restrictions.

Ignoring the effect of exchange rate movements, operating profit was up 16% to $2.6bn, driven by higher franchised margins. Company-operated margins were negatively impacted by permanent restaurant closures in Russia, the temporary restaurant closures in Ukraine, as well as by inflationary cost pressures.

Free cash flow for the year as a whole was down 23% to $5.5bn. McDonald's ended 2022 with net debt of $33.3bn up from $30.9bn at the same point in 2021.

McDonald's bought back $3.9bn of its own shares in 2022, and paid out $4.2bn of dividends.

Looking ahead, CEO Chris Kempczinski expects inflationary pressures to continue in 2023. He also noted that McDonald's' 'Accelerating the Arches' initiative now includes a greater emphasis on new restaurant openings.

The shares were trading broadly flat following the announcement.

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

Our View

Continuing underlying sales momentum allowed fourth quarter earnings to surprise to the upside. Inflation continues to weigh on profits and the group expects that to persist across 2023. There'll be challenges ahead but McDonald's has seen this before and outshone the competition during the financial crisis, whilst managing to maintain earnings growth. That could be more challenging this time round with high inflation coming into the picture.

The group's largely franchised model is an efficient operation, with McDonald's off the hook for many of the typical restaurant running costs. Cash conversion in excess of 90% means the vast majority of profits feeds into cash for the business to either spend or return to shareholders. However, some franchisees are feeling the pinch, particularly in Europe where McDonalds expects support measures to cost over $100m in 2023. McDonald's' strong cash flows give it the headroom to cope with bumps in the road and continue its expansion plans, with 1,500 net restaurant openings expected this year. It's also been spending on revitalising stores, whilst continuing to improve the digital presence.

It's not all happy meals and smiles, though. A global presence means it's exposed to some geopolitical risk. 2022 took a hit from closures in Russia and Ukraine. And lockdowns in China have tapered the group's new openings programme in the People's Republic. But following the removal of restrictions it's wasted no time in dusting off its plans to roll out across the country, with some 900 new units earmarked for 2023.

Underlying operating margins have been robust so far but the group notes inflationary pressure on labour, ingredient prices and energy. That said it's still hoping for strong top line growth in the current environment and is hopeful it can achieve an operating margin of 45%, which represents a small increase over 2022.

McDonald's is also lugging around a hefty debt pile It expects 2023 interest costs to grow in the region of 10 to 12%, driven by higher rates. The group enjoys strong cash generation but given the increasing cost of debt we think debt reduction should be a priority.

The fast food chain's convenience transformation is thriving, with improvements in the online service, delivery and drive thru. And the group's well positioned to continue pushing that initiative despite uncertainty ahead. Markets share the optimism though, and the group trades a little way above its long term average price/earnings ratio. In the short-term we believe this leaves the valuation vulnerable to any earnings shocks.

McDonald's key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 31st January 2023