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McDonald's - sales beat estimates

Second quarter revenue rose 3%, excluding the impact of exchange rates, to $5.7bn. Comparable sales grew 9.7%, beating analyst estimates, reflecting...

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Second quarter revenue rose 3%, excluding the impact of exchange rates, to $5.7bn. Comparable sales grew 9.7%, beating analyst estimates, reflecting growth across all segments.

Operating income, excluding the impact of exchange rates, fell 30% to $1.7bn. The drop was largely a result of the £1.2bn impairment charge associated with the sale of operations in Russia.

Excluding the impact of Russia, underlying operating margin at the full year is expected in the mid-40% range.

The board announced a quarterly dividend of $1.38.

The shares rose 1.4% in pre-market trading.

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

Our View

Second quarter results were another step in right direction for McDonalds, benefitting from customers happy to pay higher prices and a value range that's gaining momentum. Inflation and one-off costs associated with the sale of the Russian business weighed on profits, looking past that though - the arches are shining.

The groups' 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.

Operating cash flow's expected to come in around $8.5bn this year. That helps prop up the increased spending to expand and revitalise stores, whilst continuing to improve the digital presence.

Some of that spend will be funnelled into revamping existing McDonald's sites and pushing the 'Accelerating the Arches' strategy. Truth be told the strategy's more of a refresher, than a new direction, but the doubling down of efforts in digital and delivery are positive.

It's not all happy meals and smiles, though. While results show the group's moving swiftly on from the pandemic, the ordeal isn't firmly in the rear-view mirror just yet. Lockdowns in China have continued to impact the recovery in that region and costs across the board are trending around 22% higher so far this year.

McDonald's is also lugging around a hefty debt pile. At the end of last year net debt including leases was $43.9bn, or 3.6 times expected cash profits for this year. The group's strong cash generation and the low cost to borrow right now means this isn't a problem per-say, 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. Markets share the optimism though, and the group trades a little way above its long term average price/earnings ratio.

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.

Third Quarter Results (excluding the impact of exchange rates)

In the US, comparable sales rose 3.7% driven by price increases and value offerings across the everyday and digital ranges. Total revenue rose 6% to $2.4bn. Operating income lagged slightly, up 4% to $1.3bn as strong franchised sales were slightly offset by inflationary pressures.

International Operated Markets saw comparable sales grow 13.0%, led by strong performance from France and Germany. Total revenue fell 1%, impacted by a 17% decline in company-operated sales due to the closure of restaurants in Russia and Ukraine. Excluding the charge associated with the sale of the Russian business, operating profit rose 13% to $136.3m.

Strong performance from Japan and Brazil, partly offset by weakness in China due to restrictions, helped comparable sales from International Developmental Licences Markets rise 16%. Total revenue rose 17% to $552.3m, while operating profit rose 86% to $255.6m.

2022 capital expenditure's expected in the range of $2.0-$2.2bn helping the group achieve 1,300 net restaurant openings, excluding the impact of closures in Russia.

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: 26th July 2022