McDonald's (MCD) is trading modestly higher today after reporting Q3 earnings this morning. Non-GAAP EPS came in at $1.76, which was slightly below market expectations. Revenue fell 10.4% year/year to $5.75 bln, which was right in-line with market expectations.
You may wonder why revenue was down on a YoY basis. A lot of that is due to MCD's strategic refranchising initiative wherein MCD is converting company-owned restaurants to franchisees. So the accounting is different. Rather than including the actual food and drinks as revenue, when you become more of a franchisor, you only include the royalty revenue as revenue. This results in lower revenue but higher margins.
MCD breaks down its sales into several segments:
- US: The company's largest segment.
- International Lead Markets: Established markets including Australia, Canada, France, Germany, the UK and related markets.
- High Growth Markets: Markets that the company believes have relatively higher restaurant expansion and franchising potential including China, Italy, Korea, the Netherlands, Poland, Russia, Spain, Switzerland and related markets.
- Foundational Markets & Corporate: These are the remaining markets in the McDonald's system, each of which the company believes has the potential to operate under a largely franchised model.
Global comp sales increased +6.0%, reflecting positive guest counts in all segments. In the US, comps increased +4.1%, reflecting the national beverage and McPick 2 value promotions, along with the continued success of the Signature Crafted premium sandwich platform. Comps for the International Lead segment increased +5.7% in Q3, led by continued momentum in the UK and Canada, as well as positive results across all other markets.
In the High Growth segment, comps increased +6.2%, led by strong performance in China and positive results across the majority of the segment. In the Foundational markets, comps rose +10.2%, reflecting positive sales performance across all geographic regions.
During Q3, MCD refranchised its businesses in China and Hong Kong, reaching its target to refranchise 4,000 restaurants more than a year ahead of schedule. Moving to more of a franchise model provides a more stable revenue and income stream with higher returns on invested capital. MCD says it's optimizing its restaurant ownership mix and running better restaurants.
At the same time, MCD is also making strides with initiatives such as delivery, mobile order and pay, as well as the Experience of the Future transformation of its restaurants. In July, MCD announced it expanded McDelivery with UberEATS to 13 countries, including 3,500 restaurants in the US. McDelivery is now available across the globe from over 7,800 restaurants in 47 countries and six continents.
In sum, this was a pretty good quarter for McDonald's. While EPS and revenue was basically in-line, the same store comps of +6.0% globally and +4.1% in the US were quite good and pretty comparable to Q2's result of +6.6% globally and +3.9% in the US.