Why Did McDonald’s Revenue Decline in 2Q16?

McDonald’s (MCD) earns its revenue from company-owned restaurant sales as well as franchise fees and royalties. In 2Q16, McDonald’s revenue declined by 3.6% from $6.5 billion to $6.3 billion. Revenue from company-owned restaurants, which forms 62.5% of the total revenue, declined by 8.1%, while revenue from franchised revenues increased by 5%.

Based on the characteristics and growth opportunities of the markets, McDonald’s (MCD) reorganized its business into the following four segments in July 2015:

• United States
• International Lead Markets
• High-Growth Markets
• Foundational Markets (including corporate activities)

The revenue from this segment, which forms 33.9% of the total revenue, declined by 2.4% from $2.2 billion to $2.1 billion. Refranchising of company-owned restaurants led to a decline in company-owned restaurants, which lowered revenue from company-owned restaurants by 9.2%. However, unit growth and positive same-store sales growth drove franchised restaurants’ revenue by 4.3%.

The revenue from this segment, which forms 33.9% of the total revenue, declined by 2.4% from $2.2 billion to $2.1 billion. Refranchising of company-owned restaurants led to a decline in company-owned restaurants, which lowered revenue from company-owned restaurants by 9.2%. However, unit growth and positive same-store sales growth drove franchised restaurants’ revenue by 4.3%.

The revenue from this segment declined 4.9% from $1.9 billion to $1.8 billion. The revenue from company-owned restaurants declined by 10.7% due to refranchising and the strengthening of the dollar. Some of this revenue decline was offset by positive same-store sales growth and unit growth in franchisees, which increased revenue from franchisees by 5.3%. The decline in its revenue brought its contribution towards total revenue down to 29.4% from 29.8% in 2Q15.

With fewer company-owned restaurants, the segment posted an overall revenue decline of 3.9% with the revenue from company-owned restaurants declining by 5.2%. However, some of the decline in revenue was offset by positive same-store sales growth and unit growth in franchisees. The revenue from franchisees increased by 6.6% year-over-year. Despite revenue decline, the contribution from this segment towards total revenue stood at 24.8%.

This segment, which generates the least revenue among the four segments at 12%, posted a revenue decline of 3.2%. The revenue from company-owned restaurants declined 7.6% with a fewer number of restaurants. Revenue from franchised restaurants increased by 6%.

In 2Q16, analysts expect Jack in the Box (JACK) and Restaurant Brands International (QSR) to post revenue growth of 2.2% and 0.8%, respectively, while Wendy’s Company’s (WEN) revenue is expected to fall 25%.

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 4% to $24.4 billion. In 1Q17 and 2Q17, McDonald’s revenue is expected to decline by 5.3% and 6.6% year-over-year, respectively.

Next, we will look at same-store sales growth of McDonald’s in 2Q16.