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McDonald's (NYSE:MCD) Misses Q4 Revenue Estimates


Full Report / February 05, 2024

Fast-food chain McDonald’s (NYSE:MCD) fell short of analysts' expectations in Q4 FY2023, with revenue up 8.1% year on year to $6.41 billion. It made a non-GAAP profit of $2.95 per share, improving from its profit of $2.59 per share in the same quarter last year.

McDonald's (MCD) Q4 FY2023 Highlights:

  • Revenue: $6.41 billion vs analyst estimates of $6.45 billion (0.7% miss)
  • EPS (non-GAAP): $2.95 vs analyst estimates of $2.83 (4.4% beat)
  • Gross Margin (GAAP): 57%, in line with the same quarter last year
  • Same-Store Sales were up 3.4% year on year (miss vs. expectations of up 4.7% year on year)
  • Store Locations: 40,000 at quarter end, decreasing by 275 over the last 12 months
  • Market Capitalization: $215.5 billion

Arguably one of the most iconic brands in the world, McDonald’s (NYSE:MCD) is a fast-food behemoth known for its convenience, value, and wide assortment of menu items.

The famous golden arches were first raised in 1940 by brothers Richard and Maurice McDonald. After achieving initial success at their flagship California location, the McDonald’s brothers were hungry for growth and reinvented their business in 1948 with the “Speedee Service System”, which used an assembly-line process to prepare food.

This invention laid the foundation for the fast-food concept we know today and enabled McDonald’s to deliver on its core value proposition of quick, affordable meals that don’t compromise on taste or quality. Since then, the company has evolved into the Zeitgeist of fast-food culture and expanded its menu to include not only burgers and french fries but also salads, wraps, breakfasts, and desserts.

The average McDonald’s store size varies, but most locations feature a counter for ordering, a seating area with a mix of booths and tables, and a drive-thru for added convenience. The layout is designed to serve both dine-in and takeout customers, with digital kiosks near the cash register to accommodate self-service customers who don’t want to wait in line.

The company has restaurants around the globe and is a leader in restaurant technology. It's not only built a popular mobile app but also has partnerships with leading delivery platforms such as DoorDash, Uber Eats, and Seamless (Grubhub) to meet consumers wherever they may be.

Traditional Fast Food

Traditional fast-food restaurants are renowned for their speed and convenience, boasting menus filled with familiar and budget-friendly items. Their reputations for on-the-go consumption make them favored destinations for individuals and families needing a quick meal. This class of restaurants, however, is fighting the perception that their meals are unhealthy and made with inferior ingredients, a battle that's especially relevant today given the consumers increasing focus on health and wellness.

Fast-food competitors include Burger King and Popeyes (owned by Restaurant Brands International, NYSE:QSR), Jack in the Box (NASDAQ:JACK), Taco Bell and KFC (owned by Yum! Brands, NYSE:YUM), and Wendy’s (NASDAQ:WEN).

Sales Growth

McDonald's is one of the most widely recognized restaurant chains in the world and benefits from brand equity, giving it customer loyalty and more influence over purchasing decisions.

As you can see below, the company's annualized revenue growth rate of 4.5% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was weak , but to its credit, it opened new restaurants and grew sales at existing, established dining locations.

McDonald's Total Revenue

This quarter, McDonald's revenue grew 8.1% year on year to $6.41 billion, missing Wall Street's expectations. Looking ahead, Wall Street expects sales to grow 6.5% over the next 12 months, a deceleration from this quarter.

Number of Stores

A restaurant chain's total number of dining locations is a crucial factor influencing how much it can sell and how quickly company-level sales can grow.

When a chain like McDonald's is opening new restaurants, it usually means it's investing for growth because there's healthy demand for its meals and there are markets where the concept has few or no locations. At the end of this quarter, McDonald's operated 40,000 total locations, in line with its restaurant count 12 months ago.

McDonald's Operating Retail Locations

Taking a step back, McDonald's has generally opened new restaurants over the last eight quarters, averaging 1.3% annual increases in new locations. This growth is decent compared to other restaurant businesses but should be taken lightly as the industry is quite mature. Analyzing a restaurant's location growth is important because expansion means McDonald's has more opportunities to feed customers and generate sales.

Same-Store Sales

McDonald's demand has outpaced the broader restaurant sector over the last eight quarters. On average, the company has grown its same-store sales by a robust 10% year on year. This performance suggests its steady rollout of new restaurants could be beneficial for shareholders. When a company has strong demand, more locations should help it reach more customers seeking its meals.

McDonald's Year On Year Same Store Sales Growth

In the latest quarter, McDonald's same-store sales rose 3.4% year on year. By the company's standards, this growth was a meaningful deceleration from the 12.6% year-on-year increase it posted 12 months ago. We'll be watching McDonald's closely to see if it can reaccelerate growth.

Gross Margin & Pricing Power

We prefer higher gross margins because they not only make it easier to generate more operating profits but also indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.

McDonald's gross profit margin came in at 57% this quarter. in line with the same quarter last year. This means the company makes $0.57 for every $1 in revenue before accounting for its operating expenses. McDonald's Gross Margin (GAAP)

McDonald's has best-in-class unit economics for a restaurant company, enabling it to invest in areas such as marketing and talent to stay one step ahead of the competition. As you can see above, it's averaged an exceptional 57% gross margin over the last two years. Its margin has also been consistent over the last year, suggesting it has stable input costs (such as ingredients and transportation expenses).

Operating Margin

Operating margin is a key profitability metric for restaurants because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

This quarter, McDonald's generated an operating profit margin of 43.7%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.

McDonald's Operating Margin (GAAP)

Zooming out, McDonald's has been a well-managed company over the last two years. It's demonstrated elite profitability for a restaurant business, boasting an average operating margin of 43%. On top of that, its margin has improved, on average, by 5.3 percentage points each year, a great sign for shareholders.

EPS

Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.

In Q4, McDonald's reported EPS at $2.95, up from $2.59 in the same quarter a year ago. This print beat Wall Street's estimates by 4.4%.

McDonald's EPS (Adjusted)

Between FY2019 and FY2023, McDonald's adjusted diluted EPS grew 52.1%, translating into a decent 11.1% compounded annual growth rate. This growth is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 4.8% year-on-year increase in EPS.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.

Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.

McDonald's five-year average ROIC was 19.9%, placing it among the best restaurant companies. Just as you’d like your investment dollars to generate returns, McDonald's invested capital has produced excellent profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Over the last two years, McDonald's ROIC has averaged a 4.4 percentage point increase each year. McDonald's has historically shown the ability to generate good returns, and its rising ROIC is a great sign. It could suggest its competitive advantage or profitable investment opportunities are growing.

Key Takeaways from McDonald's Q4 Results

Revenue unfortunately missed analysts' expectations, driven by a same-store sales miss. With better gross margins, through, EPS beat. The stock is down 1.7% after reporting, trading at $292 per share.

Is Now The Time?

McDonald's may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think McDonald's is a good business. Although its revenue growth has been a little slower over the last four years, its growth over the next 12 months is expected to accelerate. And while its projected EPS for the next year is lacking, its impressive gross margins are a wonderful starting point for the overall profitability of the business. On top of that, its impressive operating margins show it has a highly efficient business model.

McDonald's price-to-earnings ratio based on the next 12 months is 23.7x. There are definitely a lot of things to like about McDonald's, and looking at the consumer landscape right now, it seems to be trading at a reasonable price.

Wall Street analysts covering the company had a one-year price target of $324.5 per share right before these results (compared to the current share price of $292), implying they saw upside in buying McDonald's in the short term.

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