Shares of McDonald's (MCD – Free McDonald’s Stock Report) rose slightly after the restaurant operator released better-than-expected fourth-quarter and full-year 2018 earnings. The top line slipped 3% from a year earlier, to $5.163 billion, which was slightly below our $5.263 billion forecast. A decline was clearly expected and nothing that investors were fretting over, as it was due to leadership's strategic refranchising initiatives (moving more of the restaurant base to the franchise model and away from company-owned locations). In constant-currency terms, the top line was flat from a year earlier and systemwide sales were up 5%. What was even more notable was the 4.4% increase in global comparable-store sales that the company recorded in the final stanza of 2018 (the Wall Street consensus was closer to 4%).
Breaking it down by geography, Foundational markets led the charge with a 7.1% comp gain, helped by a positive sales performance in Japan. The metric was up 5.2% in the International Lead segment. While all markets here were positive, the United Kingdom, Germany, and Australia stood out. Likewise, robust growth in Italy and the Netherlands helped the High Growth segment notch a 4.8% increase in same-store sales. Finally, the closely watched U.S. market experienced a 2.3% rise in comps, reflecting growth in the average check (product mix shifts and price increases). This was close to the 2.4% gain Wall Street was looking for.
Meantime, adjusted earnings clocked in at $1.97 a share, a nickel ahead of our forecast and 15% higher than the year-earlier tally. Although total operating costs and expenses rose 142 basis points as a percentage of sales, a lower tax rate and share count supported share net.
Looking at 2018 in its entirety, sales and adjusted earnings were $21.025 billion and $7.90 a share, respectively. This represented 19% growth on the bottom line. Global comparable-store sales were up 4.5%.
Turning to 2019, we expect management to stay the course, focusing on the three pillars of value, convenience, and taste. Increased delivery services, investments in mobile order/pay functionality, and menu innovation should all support earnings. Remodeled/modernized restaurants also augur well. Still, challenges remain, including stiff competition, commodity cost inflation, elevated labor expenses, and slowing economic growth in China. Foreign currency movements may also be more of a problem in 2019 than in 2018. Last year, foreign exchange provided a $0.04-a-share tailwind, though that all came in the first half of the year. Indeed, the third and fourth quarters each saw $0.05-a-share headwinds. Management estimates the 2019 headwind will be $0.13-$0.15 a share. All told, we are maintaining our 2019 share-earnings estimate of $8.20.
As for the stock, it has rebounded sharply since falling late last year during the broader market's selloff. Indeed, it is now close to its all-time high. Conservative accounts will appreciate the equity's low Beta and top marks for Safety and Price Stability, along with its respectable dividend yield. That said, the recent quotation leaves the stock with limited capital appreciation potential, in our view.
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
