Why McDonald’s net profit and margins declined in 3Q14

Net income and margins

McDonald’s (MCD) reported a net income of $1.07 billion. It declined 30%—compared to $1.5 billion in 3Q13. The decline in net income was due to higher tax, poor same-store sales, and instability in the Russian markets.

The net profit margins were also down to 15.3%—from 20.8% in 3Q13. This is still higher than its competitor—Yum! Brands (YUM). YUM had a profit margin of ~8% in the same quarter.

Higher taxes

In the earnings call, management stated that higher tax obligation affected the earnings per share (or EPS) by as much as $0.26 per share.

McDonald’s (MCD) effective tax rate for the third quarter was 44.4%. This is above the range of 30%–33.5%. According to management, taxes were driven higher because of a change in the earnings mix.

The company also experienced higher tax obligation due to an unfavorable foreign tax ruling. The ruling increased the tax and interest costs from 2003–2008. Taxes were also impacted by changes in tax reserves. Tax revenues changed because of a tax audit in some foreign markets.

The company’s operating margins declined to 29.6%—from 33% year-over-year (or YoY). On a constant currency basis, the operating income was down 14% YoY.

What’s constant currency?

McDonald’s management uses constant currency as a measurement to exclude the foreign currency translation effects. According to company filings, it’s calculated “by translating current year results at prior year average exchange rates.”

In the next part of the series, we’ll look at McDonald’s dividend yields. We’ll compare it to its competitors—like Burger King (BKW), Yum! Brands (YUM), and Wendy’s (WEN). We’ll also look at the dividend yields for the Consumer Discretionary Select Sector SPDR Fund (XLY).