Shares of McDonald's (MCD – Free McDonald’s Stock Report) rose moderately in value, setting a new all-time high, after the restaurant operator reported strong second-quarter financials. The top line was essentially flat with the year-earlier tally, clocking in at $5.341 billion, and a hair above our $5.300 billion forecast. The stagnant revenue figure reflects the company's ongoing refranchising initiatives and foreign currency headwinds (the metric was up 3% on a constant-currency basis) and is not investors' primary concern. Of much more importance are system wide sales (up 8% on a constant-currency basis) and global comparable-store sales, which climbed 6.5%.
Comps are the most closely watched sales figure, and the 6.5% increase was nicely ahead of Wall Street's consensus forecast, which was something closer to growth of 5.3%. It was also the best quarterly gain since 2012 and reflected broad-based geographic strength. Breaking it down further, the highly scrutinized U.S. comp figure rose 5.7% (4.4% was the consensus expectation), thanks to successful national and local promotions, including the 2 for $5 Mix and Match deal. Classic menu items also did well, and management's ongoing efforts regarding menu innovation, modernizing restaurants, offering delivery services, and incorporating mobile ordering/payment functionality clearly resonated with diners. The International Operated segment was also solid, posting a same-store sales advance of 6.6%, with notable strength in the United Kingdom, France, and Germany. Numbers were even better in the International Developmental Licensed segment, where comps were up 7.9%.
Below the top line, total operating costs fell on an absolute basis, though interest expenses increased 18%. A lower share count gave a boost to earnings per share and helped to soften the blow of a $0.07 foreign exchange headwind. All told, adjusted earnings rose 3% from a year earlier, to $2.05 a share, matching our estimate.
Looking ahead, we think that McDonald's will continue to execute well, as leadership appears to have a firm grasp on what customers want and is careful to never lose sight of what matters most, which is the combination of value, convenience, and taste. That said, the restaurant operator certainly faces challenges, including stiff competition and a tight labor market, which drives up labor costs and makes it harder to lure and retain employees. Foreign exchange will likely remain a headwind, as well. At this point, we are keeping our full-year 2019 earnings forecast intact at $7.95 a share, which would represent a slight uptick from the $7.90 logged in 2018.
As for McDonald's stock, we continue to think that it has appeal for conservative accounts. While the recent quotation limits its long-term capital gains potential, a respectable dividend yield and top marks for Safety, Price Stability, and Financial Strength make it more enticing for the risk-averse crowd. The equity also sports a low Beta.
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
