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McDonald's - profit growth driven by international markets

Total comparable sales, which adjust for currency changes and temporary closures, rose 12.7%...
McDonald's - profit growth driven by international markets

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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.

The shares fell 2.1% in pre-market trading.

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Our View

McDonald's may have missed the mark on fourth quarter earnings, but only just. The group's proved to be incredibly resilient, showcasing the power of its two biggest assets: its unrivalled brand and enormous footprint - which is essential for capturing the convenience traffic it so sorely needs. We're particularly heartened by the pick up in domestic trade, which is an area of strategic focus going forwards.

The group used the opportunity brought on by the pandemic to build out its digital presence and delivery options, a strategy that's boosted sales in the US. That allowed many of the restaurants to continue operating despite indoor dining restrictions. The group'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.

McDonald's "experience of the future" (read: the increased digitisation of its stores and capabilities) is a necessary move if the world's shift online is a permanent one. But outside banging the digitization 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.

It's not all happy meals and smiles, though. While McDonalds' results show the group's moving swiftly on from the pandemic, the ordeal isn't firmly in the rear-view mirror just yet. Further lockdowns can't be ruled out, particularly in parts of the world where vaccination rates are lower. We're still seeing growth in China and Australia impacted by restrictions.

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-say, but if earnings encounter another setback it's not an ideal set up.

McDonald's has done more than survive the pandemic-the fast food chain's digital transformation is thriving. The group is well positioned to continue pushing that initiative while it continues to face some uncertainty. Despite a price-to-earnings ratio beyond the long-term average we think the group's long-term growth story is a strong one 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

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
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: 28th January 2022