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Why Did McDonald’s Stock Fall after Its Q1 Results?

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Today, McDonald’s (NYSE:MCD) reported its first-quarter earnings results. For the quarter, the company reported a diluted EPS of $1.47 on revenues of $4.71 billion. The company beat analysts’ revenue expectations of $4.65 billion. Analysts expected the company’s adjusted EPS to be $1.57. Amid the COVID-19 outbreak, it’s difficult to calculate the company’s adjusted EPS. Meanwhile, the diluted EPS fell 14.5% from $1.72 to $1.47. The YoY decline in McDonald’s diluted EPS and weakness in the broader equity market led to a fall in the stock price. At 10:21 AM ET today, the company was trading 2.6% lower. Let’s look at McDonald’s first-quarter performance in detail.

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McDonald’s revenue fell

During the first quarter, McDonald’s revenue fell by 6.2% from $5.02 billion in the same quarter of the previous year. The negative SSSG of 3.4%, a decline in company-owned restaurants, and an unfavorable currency lowered the company’s sales during the quarter.

In the first two months of this year, McDonald’s reported an SSSG of 7.2%. The U.S. segment reported an SSSG of 8.1%, the International Developmental Licensed segment reported an SSSG of 8.5%, and the Market & Corporate segment reported an SSSG of 3.7%. In March, the company’s SSSG declined by 22.2% due to COVID-19. The SSSG in the U.S. segment fell by 13.4%, the International Operated Markets segment fell by 34.7%, and the Markets & Corporate segment fell by 19.4%. Due to the outbreak, some of the restaurants were closed temporarily. Restaurants that stayed open operated with limited capacity or service, which caused the company’s SSSG to fall.

Moving to the restaurant count, McDonald’s operated 56 fewer company-owned restaurants compared to the previous year. Refranchsing company-owned restaurants led to a fall in the company-owned restaurants. However, the net addition of 1,069 franchised restaurants during the last four quarters offset some of the declines.

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McDonald’s EPS

Lower operating profits and higher interest expenses dragged down McDonald’s EPS during the quarter. However, lower income tax provisions and a decline in the number of shares outstanding offset some of the EPS declines. During the quarter, the company’s operating profits decreased by 19.1% from $2.09 billion to $1.69 billion. The increase in other restaurant expenses, SG&A expenses, and other operating costs lowered the company’s operating profits. McDonald’s interest expenses increased from $274.1 million to $280 million. Due to repurchases in the last four quarters, the weighted average number of shares outstanding declined from 771.6 million to 750.7 million.

Outlook

Earlier in April, McDonald’s management withdrew its 2020 and long-term outlook. The company blamed uncertainty about how COVID-19’s impact on the global economy for its guidance withdrawal. As of today, the company has opened 75% of its restaurants across the world. In the US, the company is operating 99% of its restaurants. Most of the restaurants are only providing delivery, drive-thru, and takeout services. In the International Operated Markets segment and the International Developmental Licensed Markets segment, the company operates 45% and 80% of its restaurants, respectively.

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