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McDonald's - first quarter sales ahead of expectations

Total revenue in the first quarter was $5.9bn, with like-for-like sales up 12.6%...

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Total revenue in the first quarter was $5.9bn, with like-for-like sales up 12.6%, ahead of market estimates of 8.5%. Double-digit growth was seen in the US and overseas, both in operated and licensed markets.

Ignoring the effects of exchange rates, operating profits increased by 14% to $2.5bn, reflecting a shift in sales towards franchised restaurants with higher margins.

For 2023, management expect to open about 1,900 restaurants, of which 400 or so will be Company operated and the rest by licensees and affiliates. Operating margins are expected to land at about 45%, with free cash flow conversion of over 90%.

In February, McDonald's announced a first-quarter dividend of $1.52 per share, an increase of 10.1%.

The shares were flat following the announcement.

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

Our view

McDonald's has started the year strongly. Times are tough, but McDonald's has proven adept and managing a downturn before - it outshone the competition during the financial crisis, whilst managing to maintain earnings growth.

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. But some franchisees are feeling the pinch, particularly in Europe where McDonald's expects support measures to cost over $100m in 2023. This is by no means the end of the world, but is something that needs monitoring.

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. The bias in openings towards franchised operations should help margins once the stores are running at full pelt. It's also been spending on revitalising stores, whilst continuing to improve the digital presence.

Underlying operating margins have been robust so far but the group's been exposed to 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 about 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 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: 25th April 2023