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McDonald's - selling its Russian restaurants

Following March's suspension of restaurants in Russia, McDonald's has now announced its in the process of selling its Russian business to a local buyer...

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Following March's suspension of restaurants in Russia, McDonald's has now announced its in the process of selling its Russian business to a local buyer.

McDonald's restaurants in Ukraine remain closed while the Company continues to pay full salaries for its employees.

The sale's expected to result in a non-cash charge of between $1.2-$1.4bn. For the full year, excluding the impact of this sale, underlying operating margin is expected in the mid-40% range.

The shares fell 1.0% following the announcement.

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

Our View

First quarter results provided some extra colour on the true impact of halting operations in Russia and Ukraine, and the $127m in costs kept profits from rising as fast as sales. We've now heard the sale of all Russian restaurants is underway, which is expected to attract a hefty non-cash charge. Nevertheless, performance in the first quarter was solid, underpinned by price hikes in the US and a rebound in international sales.

The longer term picture relies on McDonald's' two biggest assets, 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. 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 with ongoing restrictions in China continuing to impact trading in the region.

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 relatively 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. Markets share the optimism thought, 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.

First Quarter Results (constant currency, 29 April 2022)

Total first quarter revenue beat analyst estimates rising 14%, ignoring the effect of exchange rates, to $5.7bn. That reflected sales growth for both company-operated and franchised restaurants which grew 7% and 14% respectfully.

Operating profit rose 3%, ignoring the effect of exchange rates, to $2.3bn. That includes $127m in costs associated with the suspension of operations in Russia and Ukraine. Without which, and excluding a $135m gain on the disposal of McDonalds Japan stock the prior year, underlying operating profit grew 18%.

The group's taken a $500m charge in preparation for the potential settlement of an international tax matter.

In the US, comparable sales increased 3.5%, driven by price increases, marketing promotions and growth in digital channels such as the 'MyMcDonald's Rewards' loyalty program. Over a 2-year period, sales were up 13.6%. Total sales rose 5% to $2.1bn, operating income lagged growing 2% to $1.2bn as costs rose.

International Operated Markets were the standout, with comparable sales 20.4% higher led by France and UK as restrictions eased. Sales were broadly flat over a 2-year basis. Total sales and operating profits both rose 21% to $2.9bn and $1.2bn respectively.

Strong performance from Japan and Brazil helped International Developmental Licences Markets rise 14.7%, up 6.4% on a 2-year basis. The resurgence of Covid in China and subsequent national lockdowns were a drag on performance. Total sales also rose 21% to $5.6bn. Given last year's exceptional gain on the disposal of McDonalds Japan stock, operating income fell 78% to $32.4m.

Total operating costs and expenses rose from $2.8bn to $3.4bn.

For 2022, the group expects capital expenditure between $2.2bn-$2.4bn which'll help achieve the target of opening 1,700-1,800 restaurants globally.

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: 17th May 2022