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Sales Leverage Expanded McDonald’s EBIT Margins

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EBIT margins

Improved sales leverage and same-store sales growth in 4Q15 expanded McDonald’s (MCD) EBIT (earnings before interest and tax) margins. The company recorded EBIT margins of 28.7% in 4Q15—compared to 26.7% in 4Q14.

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Costs and expenses

The increase in same-store sales growth and decline in commodity prices offset the increase in labor wages, especially in the US.

In the US segment, the increase in labor costs due to higher minimum wages in many states offset the margins by 3.5%. However, lower beef prices reduced the commodity cost by 1%. To offset inflationary pressure, the company stated that it increased its products price by 2%. Lower food-away-from-home inflation measures increase in prices of food products purchased outside in the US, like restaurants.

For international lead markets, the commodity costs rose by 1% in 4Q15. The commodity costs vary from market to market with a rise in the costs from 1% to 3%.

Overall, the G&A (general and administrative) cost rose by 7% in constant currencies—compared to 4Q14. It rose due to higher incentive-based compensation. Excluding the incentive-based compensation, the G&A costs fell.

You can gain exposure to McDonald’s by investing in ETFs like the Consumer Discretionary Select Sector SPDR ETF (XLY). XLY invests more than 5% of its portfolio in McDonald’s. It also has holdings in Starbucks (SBUX), Yum! Brands (YUM), and Chipotle Mexican Grill (CMG).

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