Net income and margins
In 4Q14, McDonald’s (MCD) reported a net income of $1.09 billion. It declined 21%—compared to $1.39 billion in the fourth quarter last year. The decline in net income was due to poor same-store sales. It was also due to stores closing in Russia and Ukraine, higher G&A (general and administrative) expenses in the US, and challenges in China and Japan’s markets—as we saw earlier in this series.
The net profit margins were also down to 16.7%—from 19.6% in 4Q13. This is still higher compared to Yum! Brands (YUM). Yum! Brands’ profit margin was around 8%.
What impacted the net income?
McDonald’s also experienced a higher tax obligation due to an unfavorable foreign tax ruling. The ruling increased the tax and interest costs for 2003–2008. Taxes were also impacted by changes in tax reserves. The changes were due to a tax audit in some foreign markets.
On a constant currency basis, the operating income was down 15% in the fourth quarter. It was down 8% during the year. The resulting earnings per share, or EPS, declined 14% during the quarter and 11% year-over-year, or YoY. The YoY EPS would only be down 1% if the higher taxes and the Chinese supplier issues were excluded.
What’s constant currency?
Constant currency is a measure that McDonalds’ management used to exclude the foreign currency translation effects. According to the company, it’s calculated “by translating current year results at prior year average exchange rates.”
Later in this series, we’ll look at McDonald’s dividend yield. We’ll compare McDonald’s to other restaurant companies—like Jack In The Box (JACK), Yum! Brands, and Wendy’s (WEN). We’ll also look at the dividend yield for the Consumer Discretionary Select Sector SPDR Fund (XLY).
In the next part of this series, we’ll discuss some of management’s initiatives.