Why Were McDonald’s Q3 Earnings Disappointing?

  • McDonald’s posted weaker-than-expected third-quarter earnings today.
  • The company’s global comps growth beat the estimate, but its overall revenues were lower.

McDonald’s (MCD) reported lower-than-expected third-quarter earnings today. The company’s revenues increased on a YoY (year-over-year) basis. However, the revenues fell short of analysts’ estimates, which reflected lower sales at the company-operated restaurants. Notably, McDonald’s global comparable sales beat analysts’ estimates.

Earlier, J.P. Morgan analyst John Ivankoe reduced his comps growth outlook. He expected McDonald’s to miss the third-quarter estimate.

Despite better-than-expected global comps growth, McDonald’s adjusted earnings missed analysts’ estimate by a wide margin, which reflected higher interest expenses. Also, negative currency rates remained a drag. The company’s adjusted EPS fell by about 2% on a YoY basis.

The stock fell 3.3% in the pre-market session following the company’s weaker-than-expected third-quarter performance.

McDonald’s third-quarter earnings 

McDonald’s posted total revenues of $5.43 billion, which increased about 1% YoY. The revenues fell short of analysts’ estimate of $5.49 billion. The sales at company-operated restaurants fell 4%, which pressured the top line. However, the revenues from franchised restaurants rose 5%.

Global comparable sales or comps increased 5.9%, which was better than analysts’ expectation of 5.6% growth. However, the US comps growth fell short of analysts’ estimates. McDonald’s US comps rose 4.8%, which was lower than analysts’ expectation of 5.2%. Meanwhile, the company’s international comps increased 5.6%.

McDonald’s delivery expansion and menu innovation continued to drive its comps. However, more competitive activity in the US remained a drag.

The company posted an adjusted EPS of $2.11, which fell about 2% YoY and didn’t meet analysts’ estimate of $2.21. Currency volatility had a negative impact on the bottom line by $0.03. Higher interest expenses and taxes dragged the company’s earnings down. However, share repurchases supported McDonald’s third-quarter EPS.

While McDonald’s had a disappointing quarterly performance, we think that Chipotle (CMG) could have impressive revenues and EPS growth. The company will announce its third-quarter earnings after the markets close today.

Analysts’ consensus estimate indicates that Chipotle’s third-quarter revenues could grow at a double-digit rate in the third quarter. Moreover, the company’s adjusted EPS will likely grow at an exceptional pace.

McDonald’s stock has risen 18.2% YTD (year-to-date) as of Monday. The company’s weak third-quarter performance could drag its stock down. Meanwhile, Chipotle stock has risen about 97% YTD.