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McDonald’s Beats Top- and Bottom-Line Estimates in 1Q18

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1Q18 performance

After posting its 1Q18 earnings today, McDonald’s (MCD) was trading 4.0% above yesterday’s closing price in the pre-market hours. The company posted adjusted EPS (earnings per share) of $1.79 on revenue of $5.14 billion, versus analysts’ EPS expectation of $1.67 and revenue estimate of $4.98 billion. Also, the company met analysts’ SSSG (same-store sales growth) estimate of 2.9% in the United States. The strong 1Q18 sales and earnings appear to have increased investors’ confidence, leading to a rise in the company’s stock price.

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Year-over-year performance

Year-over-year, McDonald’s revenue has declined 9.5%. The company’s strategic initiative of refranchising led McDonald’s to operate 2,570 fewer restaurants in 1Q18, which lowered the company’s revenue. However, some of the declines in revenue were offset by positive SSSG and the addition of new franchised restaurants. Compared to 1Q17, the company operated 2,951 more franchised restaurants in 1Q18.

In the United States, the company’s SSSG stood at 2.9%—driven by growth in check size, which resulted from the increase in menu prices and favorable product mix. In the International Lead segment, the company posted SSSG of 7.8% with strong performance from the United Kingdom and Germany.

In the High Growth segment, the company posted SSSG of 4.7% with positive results from China, Italy, and most parts of the segment. Foundation Markets posted SSSG of 8.7%, completing positive SSSG across all segments.

Year-over-year EPS growth

Compared to adjusted EPS of $1.47 in 1Q17, McDonald’s EPS grew 21.8% in 1Q18. The EPS growth was driven by the expansion of the company’s operating margin, a lower effective tax rate, and share repurchases. However, some of the growth in EPS was offset by a decline in 1Q18 revenues.

The company’s operating margin expanded from 35.8% to 41.7% due to growth in the franchise business, sales leverage from positive SSSG, and a decline in SG&A (selling, general, and administrative expenses) as a percentage of total revenue. The company’s effective tax rate stood at 27.1% for 1Q18, compared to 32.8% in 1Q17. In the last four quarters, from the beginning of 2Q17 to the end of 1Q18, the company repurchased shares worth 4.4 billion. In 1Q18, the company repurchased 10.4 million shares for $1.7 billion.

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