earnings growth driven by international markets

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Total comparable sales, which takes into account currency fluctuations and temporary shutdowns, increased 12.7%, reflecting increases in all markets. Adjusted for currency fluctuations, fourth quarter revenue increased 14% to $6.0 billion, with owned and franchised restaurants growing 14% and 15%, respectively, reflecting fewer restaurant closures and restrictions related to the pandemic.

Operating profit for the period increased 13%, adjusting for currency movements, to $2.4 billion as sales growth outpaced incremental costs, with most of the increase coming from the outside the United States.

The group’s outlook is in line with previous estimates, with operating margins in the low to mid range of 40% and capital expenditure between $2.2 billion and $2.4 billion.

The shares fell 2.1% in premarket trading.

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Our point of view

McDonald’s may have missed the fourth-quarter earnings target, but just a little. The group has proven to be incredibly resilient, showcasing the power of its two greatest assets: its unrivaled brand and its huge footprint – which is key to capturing much-needed local traffic. We are particularly encouraged by the resumption of internal trade, which is an area of ​​strategic focus for the future.

The group has taken the opportunity presented by the pandemic to expand its digital presence and delivery options, a strategy that has boosted sales in the United States. This has allowed many restaurants to continue operating despite indoor dining restrictions. The group isn’t giving up on this online push now that things are stabilizing, rather it’s a key pillar of McDonald’s future growth strategy. Leveraging existing infrastructure (kitchens) to serve more customers is a great recipe for margin expansion in a longer term perspective.

McDonald’s “future experience” (read: increased digitalization of its stores and capabilities) is a necessary step if the shift of the online world is permanent. But outside of banging the digitization drum, we haven’t had much clarity regarding his “Accelerating the Arks” initiatives. Platitudes like “our brand is going to become a growth engine in its own right” don’t give us much to work on. McDonald’s enviable intellectual property is a significant advantage – but we’ll reserve final judgment until we have more information.

It’s not all happy meals and smiles, though. While McDonalds’ results show the group is rapidly emerging from the pandemic, the ordeal is not yet firmly in the rearview mirror. Further lockdowns cannot be ruled out, especially in parts of the world where vaccination rates are lower. We are still seeing growth in China and Australia impacted by restrictions.

McDonald’s is also dragging a heavy pile of debt. As of December 31, 2021, net debt including leases was $43.9 billion, or 4.2x operating profit. The group’s strong cash generation and current low borrowing costs mean this isn’t a problem per se, but if earnings suffer another setback, it’s not an ideal setup.

McDonald’s has done more than survive the pandemic – the fast food chain’s digital transformation is in full swing. The group is well positioned to continue pushing this initiative as it continues to face some uncertainty. Despite a price/earnings ratio above the long-term average, we believe that the group’s long-term growth is solid, although there are no guarantees.

McDonald’s Highlights

  • Price/earnings ratio: 24.2
  • Average 10-year price-to-earnings ratio: 20.9
  • Projected dividend yield (next 12 months): 2.3%

All ratios are from Refinitiv. Remember that returns are variable and are not a reliable indicator of future income. Keep in mind that key numbers shouldn’t be considered alone – it’s important to understand the big picture.

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Fourth quarter results

Comparable sales in the United States increased 7.5% as the average order value increased. This is largely due to price increases, with the growth of the group’s loyalty program helping digital sales. Total sales rose 8% to $2.2 billion as franchise and company-owned stores saw revenue increases. Operating profit rose 2% to $1.1 billion, reflecting lower marketing spending and the impact of restaurant sales.

France, the United Kingdom, Italy and Germany increased their comparable sales by 16.8% in the international operated markets as restaurants reopened. Total sales increased 20% to $3.2 billion. That was outpaced by operating profit growth of 40% to $1.4 billion as costs related to store closures and bad debt fell.

International licensed development markets saw comparable sales increase 14.2% as the segment performed well overall, offsetting a decline in sales from China as restrictions continue. Total sales increased 12% to $529 million. There was an operating loss of $94.8 million related to increased incentive compensation and charitable contributions.

Net debt was $30.9 billion, compared to $31.7 billion last year. Full-year free cash flow nearly doubled to $4.7 billion, reflecting an increase in cash generated from operations.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated, estimates, including forward-looking returns, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Returns are variable and not guaranteed. Investments go up and down in value, so investors could suffer a loss.

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