Shares of McDonald's (MCD – Free McDonald’s Stock Report) rose moderately after the iconic restaurant operator reported fourth-quarter financials that were generally in line with our expectations. Sales were a bit better than we had forecast, with the top line rising 4% from a year earlier, to $5.349 billion. Our call was $5.297 billion. Robust comparable-store sales were the primary reason behind the top-line beat. Indeed, global same-store sales climbed 5.9% on broad-based strength. The International Developmental Licensed segment led the charge with a 6.6% increase, though the International Operated segment wasn't far behind with its 6.2% gain. In the closely watched U.S. market, comparable-restaurant sales were up 5.1%. On average, investors had looked for global and U.S. comps to rise approximately 5.2% and 4.7%, respectively. That said, guest traffic in the United States slipped in the fourth quarter and was up just slightly overall.
In terms of profitability, increased expenses related to modernizing stores and digitizing more of the customer experience kept the higher revenue figure from falling to the bottom line. Indeed, SG&A expenses increased 41 basis points as a percentage of the top line versus the like period of 2018. Other headwinds included a 37-basis-point increase in interest expenses, while unfavorable foreign currency movements trimmed $0.02 a share from the bottom line. Excluding an $0.11-per-share tax benefit in the final stanza of 2019, earnings clocked in at $1.97, matching both our estimate and the year-earlier tally.
For the whole of 2019, McDonald's earned adjusted net income of $7.84 a share on revenues of $21.077 billion. Comparable-store sales rose 5.9% and systemwide sales were north of $100 billion.
Looking ahead, we are leaving our 2020 share-earnings estimate unchanged at $8.50. We think that comps will continue to grow at a healthy clip, but improving traffic trends in the United States will likely be challenging in the face of stiff competition from myriad rivals. Expenses ought to remain slightly elevated, as well, as the company continues to invest in things like delivery, digitizing more transactions, and modernizing restaurants. That said, recent investments should start paying off, and we expect earnings to return to growth mode this year.
As for McDonald's stock, we think that its primary allure is for conservative investors looking for a healthy dividend yield. Aggressive accounts will probably want to look elsewhere.
About The Company: McDonald's is a leading global foodservice retailer with over 37,000 locations in more than 100 countries (as of December 31, 2018). The majority of the restaurants (over 90%) are operated by franchisees or affiliates. The company is best known for its hamburgers and French fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks.
– Matthew E. Spencer, CFA
