EBIT (earnings before interest and tax) are key to investment decisions because they indicate the efficiency of a company’s business. EBIT affects EPS (earnings per share) and ultimately drives share prices.
Fiscal 1Q16 was a good quarter for fast-food and pizza companies. Compared to 1Q15, seven of our eight select companies for this review saw their margins improve in 1Q16.
Restaurant Brands International (QSR), with approximately 100% of its restaurants franchised, enjoys higher margins at 39.8%. QSR’s margins improved from the 28.8% it saw in 1Q15 because it sold company-owned restaurants to franchisees and sales leverage from positive sales growth. In 1Q15, the company had also incurred transaction and restructuring costs due to the acquisition of Tim Hortons.
By comparison, McDonald’s (MCD) had an EBIT margin of 30.2% in 1Q16. Sales leverage, lower commodity prices, and increased efficiency all drove MCD’s margin up from 23.3% in 1Q15. Notably, MCD makes up 0.64% of the iShares Core S&P 500 ETF (IVV).
YUM! Brands (YUM) and Domino’s Pizza (DPZ) had EBIT margins of 22.1% and 18.3%, respectively, in 1Q16. Although DPZ’s margins declined from 18.8% in 1Q15, the company still enjoyed better margins than some of the other companies in 1Q16.
While Papa John’s (PZZA) margins improved from 8.7% in 1Q15 to 10% in 1Q16, it still had the lowest EBIT margin among our eight companies. PZZA’s margins improved due to lower commodity prices and sales leverages from positive same-store sales.
Jack in the Box (JACK) had an EBIT margin of 14.6% in 1Q16, an improvement over its 13.1% in 1Q15. Favorable commodity prices and lower administrative expenses offset increases in labor expenses for JACK in 1Q16, hiking its EBIT margin. Meanwhile, Sonic (SONC) and Wendy’s (WEN) improved their margins year-over-year, posting margins of 16.7% and 16.9%, respectively.
In the next part, we’ll discuss EPS growth for our select group of major fast food and pizza companies.