Shares of McDonald's (MCD – Free McDonald’s Stock Report) pulled back marginally after the restaurant operator reported solid second-quarter results that were in line with our forecasts. Comparable-store sales in the United States were slightly weaker than some investors had been looking for due to stiff competition, but the metric was still positive and strength in other corners of the globe helped pick up the slack.
Specifically, comps rose 2.6% in the United States, thanks to a higher average check, which was the result of menu price increases and favorable product mix shifts. Foundational markets posted the best comp increase at 6.8%, but the bigger story was likely the 4.9% gain in the International Lead segment. This figure was much better than anticipated and reflected broad based strength, with the United Kingdom and France leading the charge. The High Growth segment rounded things out with a 2.4% comp gain, as a strong performance in Italy was partially offset by weakness in South Korea. All told, global comparable-store sales rose 4.0% in the June quarter, a solid showing in our view.
Taking a closer look at the income statement, systemwide sales were up 5% in constant currencies, but the top line fell 12% from a year earlier (down 14% in constant currencies), to $5.354 billion, nearly matching our $5.350 billion forecast. The year-to-year decline stemmed from management's efforts to convert more company owned restaurants into franchised locations, so we are not concerned by the dip. On the bottom line, share earnings clocked in at $1.99 (excluding $0.09 a share of restructuring charges), up 17% from a year earlier and a penny ahead of our call. The higher comp, combined with a lower share count and more favorable tax rate, enabled the heady share-net increase.
As noted above, competition in the United States is fierce, though we believe that McDonald's is executing well with its various growth initiatives, which include restaurant remodels, menu innovation, mobile order/pay capabilities, and the rollout of delivery services through third-party providers. All told, we are maintaining our full-year 2018 earnings estimate of $7.70 a share.
As for the stock, we think that it has appeal for conservative accounts. Capital gains potential is not head turning, but it looks better on a risk-adjusted basis, given MCD's top marks for Safety and Price Stability, as well as the company's A++ (Highest) rank for Financial Strength. An above-average dividend yield sweetens the pot.
About The Company: McDonald's is a quick service restaurant with some 37,000 locations in more than 100 countries (as of December 31, 2017). 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
