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Why Did McDonald’s 1Q16 Revenue Fall?

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Revenue sources

McDonald’s (MCD) earns its revenue from company-owned restaurant sales as well as franchise fees and royalties. In 1Q16, revenue from company-owned restaurants declined 4.1% from $3.9 billion in 1Q15 to $3.8 billion in 1Q16. The decline was mainly due to refranchising and the closing of underperforming restaurants in 2015. The revenue from franchised restaurants grew by 5.2% from $2 billion to $2.2 billion.

Why Did McDonald’s 1Q16 Revenue Decline?

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Segmentation

Based on the characteristics and growth opportunities of the markets, in July 2015, McDonald’s (MCD), which makes up 5% of the SPDR Dow Jones Industrial Average ETF (DIA), reorganized its business into four segments: US, international lead markets, high growth markets, and foundational markets and corporate.

  • US segment: The revenue from this segment, which forms 34.2% of the total revenue, rose by 2.1%. The revenue from franchised restaurants rose by 6.6% while the revenue from company-owned restaurants declined by 2.4%. All-day breakfast, McPick 2 platforms, and the enhancement of core menu items to improve quality perception has led to an increase of the segment’s same-store sales growth and revenue.
  • International lead segment: The revenue collected from this segment, which forms 29.3% of the total revenue, declined by 3.5% due to the decline of 7.8% in revenue from company-owned restaurants. However, the 4.2% increase in revenue from franchised restaurants offset some of the revenue decline. Revenue from company-owned restaurants declined due to refranchising as the company operated 149 fewer company-owned restaurants in 1Q16 compared to 1Q15.
  • High growth market: With fewer company-owned restaurants, the segment posted a decline of 1% in its revenue with revenue from company-owned restaurants declining 1.8% while the revenue from franchised restaurants increased by 5.5%. Recovery in China, Russia, and Japan offset some of the revenue decline. The high growth market segment forms 24.4% of the total revenue generated.
  • Foundational markets and corporate: This segment, which generates the least revenue among the four segments at 12.1%, posted a revenue decline of 2.8%. The revenue from company-owned restaurants declined 4.9% with a fewer number of restaurants. Revenue from franchised restaurants increased by 1.5%.

Peer comparison

During 1Q16, Starbucks (SBUX) and YUM! Brands (YUM) posted revenue growth of 9.4% and -0.1%, respectively. Domino’s Pizza (DPZ) is expected to post revenue growth of 8.5%.

Outlook

With the expectation that McDonald’s will continue to work toward its goal of increasing franchised restaurants to 95%, analysts are expecting the revenue for 2016 to decline by 3.9% to $24.4 billion.

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