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McDonald's - closing restaurants in Russia

McDonald's has temporarily closed all restaurants in Russia and paused operations in the market.

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McDonald's has temporarily closed all restaurants in Russia and paused operations in the market. The group's 62,000 employees in the region will continue to be paid.

The group has 847 restaurants in Russia, of which 84% are owned and operated by McDonald's - the remainder being franchisees. All 108 restaurants in Ukraine are company-owned.

For the full year 2021, Russia and Ukraine represented around 9% of revenue and less than 3% of operating income.

The shares fell 1% on the day of the announcement.

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

Our View

The crisis in Ukraine and subsequent closure of restaurants in the region will impact group revenue. But operationally speaking, it won't have a major effect on profits. That's because most restaurants across both Russia and Ukraine are the less lucrative company owned sites, as opposed to those operating under the more profitable franchised model.

While it's a development worth watching, it doesn't change the long-term picture.

McDonald's' two biggest assets are its unrivalled brand and enormous footprint. That's carried it through the past two years of disruption. Importantly, they'll play a role in capturing convenience traffic and have helped boost domestic trade, an area of strategic focus moving forwards.

The group's built out its digital presence and delivery options, a strategy that's boosted sales in the US. That allowed many restaurants to continue operating despite indoor dining restrictions last year. It's not abandoning this push online now that things are settling down, instead it's a key pillar in McDonald's future growth strategy.

Leveraging existing infrastructure (kitchens) to serve more customers is a great recipe for margin expansion when looking at a longer-term view. That's being underpinned by the new digital loyalty programmes like 'MyMcDonald's' in the US, which gained 30m members in the first 6 months since launch. Having customers actively able to engage in digital experiences should help capture and retain business in a world where digital convenience is highly sought after.

McDonald's ''experience of the future'' (read: the increased digitisation of its stores and capabilities) is a necessary move as the worlds shift online looks more and more sticky. But outside banging the digitisation drum, we've not had much clarity regarding its -''Accelerating the Arches" initiatives. 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 is a significant advantage - but we'll reserve final judgement until we have more information.

While McDonald's' results show the group's moving swiftly on from the pandemic, the ordeal isn't firmly in the rear-view mirror just yet. In the fourth quarter we saw restrictions in China impact sales recovery, and we can't rule out a similar impact in the current quarter as fresh restrictions were introduced in January.

McDonald's is also lugging around a hefty debt pile. As of 31 December 2021, net debt including leases was $43.9bn, or 4.2x operating profits. The group's strong cash generation and current low borrowing costs means this isn't a problem per se, but if earnings encounter another setback it's not an ideal set up.

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. Worries about the crisis in Ukraine and its impact on the bottom line have bought down the price-to-earnings ratio, though it's still a touch above the long-term average. We think the group's long-term growth story is still intact, although there are no guarantees.

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.

Fourth Quarter Results (28 January 2022)

Total comparable sales, which adjust for currency changes and temporary closures, rose 12.7%, reflecting increases across all markets. Adjusted for currency fluctuations, fourth quarter revenue was up 14% to $6.0bn, with owned and franchised restaurants posting 14% and 15% growth respectively, reflecting fewer restaurant closures and pandemic-related restrictions.

Operating profit for the period was up 13%, adjusting for currency movements, to $2.4bn as sales growth outpaced additional costs, with most of the rise coming from outside the US.

The group's outlook is in line with previous estimates, with operating margins in the low-to-mid 40% range and capital expenditures between $2.2bn - $2.4bn.

Comparable sales in the US rose 7.5% as average order value increased. That was largely driven by price increases, with growth in the group's loyalty program helping digital sales. Total sales grew 8% to $2.2bn as both franchised and company owned stores saw revenue rise. Operating profits were up 2% to $1.1bn, reflecting lower marketing spend and the impact of restaurant sales.

France, the UK, Italy, and Germany drove comparable sales up 16.8% in International Operated Markets as restaurants reopened. Total sales rose 20% to $3.2bn. That was outpaced by operating income growth of 40% to $1.4bn as costs relating to store closures and bad debts fell.

International Developmental Licensed Markets saw comparable sales rise 14.2% as the segment performed well as a whole, offsetting a drop in sales from China as restrictions continue. Total sales rose 12% to $529m. There was an operating loss of $94.8m related to an increase in incentive-based compensation and charitable contributions.

Net debt stood at $30.9bn, down from $31.7bn last year. Full-year free cash flow nearly doubled to $4.7bn reflecting an increase in cash generated by operations.

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
Matt-Britzman
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 11th March 2022