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What Drove McDonald’s Earnings Margin in 1Q18?

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May. 4 2018, Updated 8:02 a.m. ET

1Q18 EBIT margin

In 1Q18, McDonald’s (MCD) posted EBIT (earnings before interest and tax) of $2.3 billion, which represents an EBIT margin of 41.7%. The company posted an EBIT margin of 35.8% in 1Q17.

The restaurant margin from franchised restaurants expanded from 81.0% to 81.6% due to sales leverage from positive SSSG (same-store sales growth) and growth in the franchise business.

However, the restaurant margin of company-owned restaurants fell from 17.5% to 16.0%. In the US, margins improved from 15.3% to 15.8% due to sales leverage from positive SSSG and refranchising, which was partially offset by higher labor and commodity expenses. In International Lead markets, the margins were flat, as strong SSSG was offset by increased labor, commodity, and occupancy expenses. In its High Growth Market segment, the margins contracted from 17.1% to 10.2% due to the refranchising of company-owned restaurants in China and Hong Kong and sales deleverage from negative SSSG in South Korea. In the Foundational Markets segment, the margins fell from 16.6% to 15.8%.

The company’s SG&A (selling, general, and administrative) expenses increased from 9.2% to 10.4%. However, under constant currency, the company’s SG&A margin declined due to cost-saving initiatives, which were partially offset by higher technology-related spending.

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Peer comparisons

During the same period, Starbucks (SBUX) posted an EBIT margin of 16.2%, while Wendy’s (WEN) and Jack in the Box (JACK) are expected to post EBIT margins of 17.2% and 21.7%, respectively.

Next, we’ll look at McDonald’s 1Q18 EPS.

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