Shares of McDonald's (MCD – Free McDonald’s Stock Report) were little changed after the restaurant operator delivered a strong first-quarter sales performance but missed the mark on the bottom line. While the top line did slip nearly 4% from a year earlier, to $4.956 billion, the figure was slightly ahead of our $4.950 billion forecast. Moreover, the year-over-year dip was due to the effects of refranchising activity and unfavorable foreign currency movements, not a deterioration in fundamentals. In fact, global comparable-store sales rose a better-than-expected 5.4%, with growth in all geographic segments. This also marked the 15th consecutive quarter of positive comps.
Digging deeper, the metric rose 6.0% in the International Operated segment, led by growth in the United Kingdom and France. The International Developmental Licensed business also notched a 6.0% comp gain, thanks to broad-based strength. In the closely watched U.S. market, same-store sales climbed 4.5%, helped by a host of successful promotions, such as the bacon Event, 2 for $5 Mix and Match deal, and Donut Sticks.
Earnings, on the other hand, came in a bit below our expectation, but once again, this was not a sign of weak fundamentals and no real cause for alarm (Wall Street was not overly concerned judging by the stock's muted reaction). Specifically, GAAP earnings were $1.72 a share, $0.13 below our estimate, but this included $0.06 a share of ``additional income tax costs due to regulations issued in January 2019 related to the Tax Cuts and Jobs Act,'' as well as a $0.09 headwind from unfavorable foreign exchange rate movements.
We look for the momentum to continue. Management is working aggressively to ensure the restaurant chain stays relevant with menu innovation, modernized locations, delivery services, mobile order/pay functionality, etc. And it’s doing this without losing sight of what made the company iconic in the first place: a focus on value, convenience, and taste. Still, there are challenges, including the aforementioned currency headwinds and elevated labor costs.
Overall, we continue to like McDonald's stock for conservative income-focused investors. It ticks all the right boxes, including a low Beta and top marks for Safety, Price Stability, and Financial Strength. Too, the dividend yield is above the Value Line median. On the downside, long-term capital gains potential looks unimpressive, as the stock recently hit an all-time high of nearly $200.
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
