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McDonald's 1Q17 Expectations: Who's Loving What

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Part 3
McDonald's 1Q17 Expectations: Who's Loving What PART 3 OF 6

Understanding McDonald’s Margin Expecations for 1Q17

1Q17 EBIT estimates

Wall Street analysts are expecting McDonald’s (MCD) to post EBIT (earnings before interest and tax) of $1.84 billion in 1Q17, which represents an EBIT margin of 33.3%, as compared to its EBIT margin of 30.1% in 1Q16.

Understanding McDonald&#8217;s Margin Expecations for 1Q17

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Factors that could increase MCD’s margins

Analysts are expecting refranchising, sales leverage from positive same-store sales growth, lower commodity prices, and falling SG&A (selling, general, and administrative) expenses to drive McDonald’s margins in 1Q17.

The refranchising of its restaurants is expected to improve McDonald’s margins as the company enjoys higher margins from franchised restaurants revenues. The company has adopted several initiatives to reduce its SG&A (selling, general, and administrative) expenses.

These initiatives include redesigning its operations to eliminate layers and have resulted in employee layoffs and in the centralization of the non-customer-facing process to reduce expenses. Notably, these initiatives could have prompted analysts to lower their SG&A expenses estimate to 9.7% of total revenue, as compared to 9.8% in 1Q16. With a higher number of restaurants being sold to franchisees, analysts expect MCD’s D&A (depreciation and amortization) to decline from 6.5% to 6.4% of total revenue.

Peer comparisons and outlook

In 1Q17, analysts are expecting Wendy’s (WEN), Jack in the Box (JACK), and Restaurant Brands International (QSR) to post EBIT margins of 21.7%, 15.6%, and 40.2%, respectively. In 1Q16, these companies posted EBIT margins of 17.8%, 13.1%, and 43.3%, respectively.

Analysts are expecting McDonald’s to post an EBIT margin of 38.1% in 2017, as compared to 32.8% in 2016. Refranchising, sales leverage, and lower commodity prices are expected to drive McDonald’s margin in 2017.

Next, we’ll look at McDonald’s 1Q17 earnings estimate.

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