McDonald’s Corporation (NYSE:MCD) posted better-than-expected results for the first quarter for 2016. The company also recorded positive comps growth on the back of solid comps across all its segments.
The upside can be attributed to the turnaround plan announced by CEO Steve Easterbrook in May 2015. However, currency headwinds continued to keep profits under pressure.
Earnings and Revenue Discussion
McDonald’s earnings of $1.23 beat the Zacks Consensus Estimate of $1.16 by 6%. Meanwhile, in constant currencies, it surged 51% year over year.
The upside reflects a decline in total costs and expenses, and a lower share count.
Foreign currency translation had a negative impact of 4 cents per share on quarterly earnings. Including the impact of foreign exchange, earnings registered a 46% year-over-year upside.
Revenues of $5.90 billion dipped 1% year over year mainly due to currency headwinds. However, in constant currencies, the figure improved 3% driven by comps growth at all of its segments. Revenues also beat the Zacks Consensus Estimate of $5.87 billion by a marginal 0.5%.
Behind the Headlines Numbers
In the quarter, revenues at company-operated restaurants declined approximately 4% to $3.75 billion. Revenues at franchise-operated restaurants, however, grew 5% to $2.15 billion.
Global comps grew 6.2%, comparing favorably with last quarter’s 5% increase, supported by positive comps across all the segments.
Effective Jul 1, 2015, the company began reporting results under four segments: U.S. (the company's largest segment), International Lead Markets (mature markets including Australia, Canada, France, Germany and the UK), High-Growth Markets (markets that have high restaurant expansion and franchising potential such as China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands) and Foundational Markets (the remaining markets in McDonald's system).
U.S.comps grew 5.4% in the first quarter, reflecting the success of the All Day Breakfast platform, launched in 2015, and the popularity of the company’s national value platform – McPick 2. However, comps growth was marginally lower than the prior-quarter improvement of 5.7%.
Segment operating income soared 15% driven mainly by higher sales-driven franchised margins and a rise in gains from restaurant refranchising.
The company remains focused on the long-term value platform, menu innovation and simplifying restaurant operations to improve guest experience.
Comps at the International Lead Markets segment grew 5.2%, higher than an increase of 4.2% last quarter. Comps were driven by strong performance in Australia, the UK and Canada. The upside reflects multiple menu, service and value initiatives across most of the segments, which led to positive consumer response.
Operating income soared 12%, including the impact of foreign exchange headwinds. In constant currency, the figure was up 16%. However, macroeconomic concerns in France and Germany continue to pose risks.
Comps grew 3.6% in High-Growth Markets, reflecting an impressive performance in Russia and China. However, the figure compared unfavorably with comps growth of 3% last quarter.
Comps in Foundational Markets jumped 11%, higher than the prior-quarter improvement of 5.9%, primarily on the back of strong sales in Japan.
Operating income increased in both the High-Growth Markets and Foundational Markets, reflecting the absence of prior-year strategic expenses and recovery from the impact of the 2014 supplier issue – both of which had hurt results in China and Japan in the first quarter of 2015.
Total operating costs declined approximately 10% year over year to $4.12 billion. Total operating income surged 28% to $1.78 billion on the back of lower expenses.
McDonald’s has a Zacks Rank #2 (Buy).
Other Stocks to Consider
Other well-ranked stocks in the same industry include Darden Restaurants, Inc. (NYSE:DRI) , Dave & Buster's Entertainment, Inc. (NASDAQ:PLAY) and Carrols Restaurant Group, Inc. (NASDAQ:TAST) . All these stocks sport a Zacks Rank #1 (Strong Buy).
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