Must-know: The costs of McDonalds’ key metrics

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McDonalds’ key metric costs

Along with a focus on increasing comparable sales, keeping costs in control is equally important. McDonald’s (MCD) operates only 20% of company-operated restaurants. The remaining 80% are franchises, which contribute to 70% of the margins.

2014-07-25 Operating Income

 

Revenues

The revenues increased by 1% to $7.18 billion from $7.08 billion, compared to the same quarter in 2013. McDonald’s attributed this increase in revenues, despite flat comparable sales, to “higher average check” and “negative guest traffic.” Also, McDonald’s faces competition from Yum Brands (YUM), Burger King (BKW) and Wendy’s (or WEN) apart from other players in the restaurant industry. Investors can access the food industry through exchange-traded funds (or ETFs) like the PowerShares Dynamic Leisure and Entertainment ETF (PEJ) and the PowerShares Dynamic Leisure and Entertainment ETF (PBJ).

Franchise margins

The franchise margins declined by 0.6% to 82.2% in 2Q14 due to an increase in rents and depreciation expense along with franchising. The company operated margins also declined by 0.6% to 17.1% over the same period. Let’s look at how the costs have impacted margins.

Company operated margins

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The company operated margins from U.S. declined by 0.4% to 18.3% due to higher labor and commodity cost, which were 3% higher. The European company operated margins declined by 0.8% to 18.6% due to Germany’s negative performance and weaker currencies in Ukraine and Russia, which together import commodities in either USDor Euro denominated currencies.

G&A costs

General and administrative costs increased by 3%, constant currencies, in the second quarter due to a worldwide convention. However, since the company doesn’t expect to meet its growth targets, management has lowered these targets from 8% to 5% for the year.

Foreign currency impacts

The company doesn’t expect any unusual impacts due to changes in currency translation, with a positive $0.01 impact on 2Q14 earnings per share (or EPS) and a negative $0.04–$0.05 impact on a full year basis.

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