McDonald’s: Reports Q4 And Full Year 2018 Results

Chicago / IL. (mdc) McDonald’s Corporation announced results for the fourth quarter and year ended December 31, 2018. «Our performance in 2018 was strong, driven by the Velocity Growth Plan with broad-based momentum across each of our global segments. We continued to transform our business by making substantial progress on modernising our restaurants and offering more convenience, choice and value to our customers,» said McDonald’s President and Chief Executive Officer Steve Easterbrook. «We’ve now achieved 14 consecutive quarters of positive global comparable sales and our customers rewarded us with more visits in 2018, helping us to achieve two consecutive years of global guest count growth for the first time since 2012.»

Fourth quarter highlights

• Global comparable sales increased 4.4 percent, reflecting positive comparable sales across all segments.
• Due to the impact of the Company’s strategic refranchising initiative, consolidated revenues decreased 3 percent (flat in constant currencies).
• Systemwide sales increased 5 percent in constant currencies.
• Consolidated operating income decreased 7 percent (4 percent in constant currencies) primarily due to non-cash impairment charges. Excluding these charges, consolidated operating income was flat (increased 3 percent in constant currencies).
• Diluted earnings per share was USD 1.82, reflecting non-cash impairment charges of USD 0.18 per share, partly offset by an income tax benefit of USD 0.03 per share associated with the final 2018 adjustments to the provisional amounts recorded in the prior year under the Tax Cuts and Jobs Act of 2017. Excluding these items, diluted earnings per share was USD 1.97, an increase of 15 percent (18 percent in constant currencies) over prior year earnings per share (excluding USD 0.84 per share of prior year net tax cost under the Tax Act).

Full year highlights

• Global comparable sales increased 4.5 percent, reflecting positive comparable sales across all segments.
• Due to the impact of the Company’s strategic refranchising initiative, consolidated revenues decreased 8 percent (8 percent in constant currencies).
• Consolidated operating income decreased 8 percent (8 percent in constant currencies). 2018 results included non-cash impairment and strategic restructuring charges. 2017 results reflected a gain on the sale of the Company’s businesses in China and Hong Kong, partly offset by restructuring and impairment charges. Excluding these items in both years, consolidated operating income increased 2 percent (2 percent in constant currencies).
• Diluted earnings per share of USD 7.54 increased 18 percent (18 percent in constant currencies). Refer to the Key Highlights – Consolidated page for additional details.
• Cash provided by operations was USD 7.0 billion and free cash flow was USD 4.2 billion, a 14 percent increase over the prior year.
• The Company returned USD 8.5 billion to shareholders through share repurchases and dividends. In addition, the Company announced a 15 percent increase in its quarterly dividend to USD 1.16 per share beginning in the fourth quarter 2018, and increased the cash return to shareholder target for the 3-year period ending 2019 to about USD 25 billion.

On January 24, 2019, McDonald’s Board of Directors declared a quarterly cash dividend of USD 1.16 per share of common stock payable on March 15, 2019 to shareholders of record at the close of business on March 1, 2019.

In the U.S., fourth quarter comparable sales increased 2.3 percent, driven by growth in average check resulting from both product mix shifts and menu price increases. Operating income for the quarter decreased 1.0 percent, reflecting lower Company-operated margin Dollars and lower gains on sales of restaurant businesses, partly offset by higher franchised margin Dollars and G+A savings.

In the International Lead segment, fourth quarter comparable sales increased 5.2 percent, reflecting positive results across all markets, primarily driven by the U.K., Germany and Australia. The segment’s operating income increased 8 percent (12 percent in constant currencies), due to sales-driven improvements in franchised margin Dollars and higher gains on sales of restaurant businesses in the U.K. and Australia.

In the High Growth segment, fourth quarter comparable sales increased 4.8 percent, led by continued strong performance in Italy and the Netherlands, and positive results across most of the segment. The segment’s operating income decreased 44 percent (41 percent in constant currencies), reflecting non-cash impairment charges. Excluding these charges, the segment’s operating income decreased 2 percent (increased 2 percent in constant currencies).

In the Foundational markets, fourth quarter comparable sales increased 7.1 percent, reflecting positive sales performance in Japan and across all geographic regions.

Steve Easterbrook concluded, «As we begin 2019, we have confidence in our plan and the continued growth opportunities from delivery, Experience of the Future and digital. We remain committed to running great restaurants, which will continue to make a difference for our customers and drive long-term sustainable growth.»

Key Highlights – Consolidated

Results for the quarter and year reflected a lower effective tax rate, and stronger operating performance due to an increase in sales-driven franchised margin Dollars, partly offset by the comparison to a prior year tax benefit in Japan in the fourth quarter 2017 and by lower Company-operated margin Dollars due to the impact of refranchising. Foreign currency translation had a negative impact of USD 0.05 on diluted earnings per share for the quarter and a positive impact of USD 0.04 for the year. Outlined below is additional information for the quarter and full year:

Fourth Quarter

• Fourth quarter diluted earnings per share was USD 1.82. Included in the quarter results were:
  • approximately USD 140 million, or USD 0.18 per share, of non-cash impairment charges; and
  • approximately USD 25 million, or USD 0.03 per share, of income tax benefit associated with the final 2018 adjustments to the provisional amounts recorded in the prior year under the Tax Act.
• Excluding the above items, as well as the prior year provisional net tax cost of approximately USD 700 million under the Tax Act, or USD 0.84 per share, fourth quarter net income was USD 1,527.5 million, an increase of 11 percent (15 percent in constant currencies), and diluted earnings per share was USD 1.97, an increase of 15 percent (18 percent in constant currencies).

Full Year

• Full year diluted earnings per share of USD 7.54 increased 18 percent (18 percent in constant currencies). Included in the full year results were:
  • approximately USD 140 million, or USD 0.17 per share, of non-cash impairment charges;
  • pre-tax strategic restructuring charges of USD 94 million, or USD 0.09 per share (of which USD 85 million relates to the restructuring of the U.S. business); and
  • approximately USD 75 million, or USD 0.10 per share, of net tax cost associated with 2018 adjustments to the provisional amounts recorded in the prior year under the Tax Act.
• Excluding the above items, as well as the prior year provisional net tax cost of approximately USD 700 million under the Tax Act, a pre-tax gain of approximately USD 850 million on the sale of the Company’s businesses in China and Hong Kong, and USD 150 million of restructuring and impairment charges, for a total net cost of USD 0.29 per share, full year net income was USD 6,205.3 million, an increase of 14 percent (14 percent in constant currencies), and diluted earnings per share was USD 7.90, an increase of 19 percent (18 percent in constant currencies).

The following definitions apply to these terms as used throughout this release

Comparable sales represent sales at all restaurants and comparable guest counts represent the number of transactions at all restaurants, whether operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed. Some of the reasons restaurants may be temporarily closed include reimaging or remodelling, rebuilding, road construction and natural disasters. Comparable sales exclude the impact of currency translation and sales from hyper-inflationary markets (currently only Venezuela). Management generally identifies hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100 percent. Management believes that these exclusions more accurately reflect the underlying business trends. Comparable sales are driven by changes in guest counts and average check, which is affected by changes in pricing and product mix. Typically, pricing has a greater impact on average check than product mix. Management reviews the increase or decrease in comparable sales and comparable guest counts compared with the same period in the prior year to assess business trends.

Systemwide sales include sales at all restaurants, whether operated by the Company or by franchisees. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company’s financial performance, because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base.

Information in constant currency is calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results excluding the effect of foreign currency translation, impairment and other strategic charges and gains, as well as adjustments to the provisional amounts recorded in December 2017 under the Tax Act, and bases incentive compensation plans on these results, because the Company believes this better represents underlying business trends.

Free cash flow is defined as cash provided by operations less capital expenditures. Management reviews this measure in order to evaluate the Company’s ability to convert net profits into cash resources, after reinvesting in the core business, that can be used to pursue opportunities to enhance shareholder value.