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What I’ll Be Watching When McDonald’s Posts Earnings on Tuesday

Demitrios Kalogeropoulos, The Motley Fool

McDonald's (NYSE: MCD) is set to announce first-quarter results before the market opens on Tuesday, April 30. Investors have good reasons to follow this report, including the fact that sales gains have held steady over the last three consecutive quarters and might break from that trend -- in either direction -- at the start of fiscal 2019.

The fast-food titan will also have some important comments about the industry and the scale of its financial returns to shareholders. With that in mind, let's look at what McDonald's might reveal for investors on Tuesday.

A man takes a bite out of a burger.

Image source: Getty Images.

Customer traffic at home

McDonald's U.S. restaurant base only constitutes about one third of its global footprint, but that market is getting most of management's attention these days. Sales gains aren't as robust at home as they've been in places like France and the U.K. lately. Comparable-store sales growth last quarter held at about 2%, while international segments jumped by between 5% and 6%.

CEO Steve Easterbrook and his team have been predicting that the U.S. segment will catch up to the rest of the world with help from a remodeling initiative that will pour almost $2 billion into upgrading and improving restaurants and adding offerings like mobile ordering and home delivery. We'll find out on Tuesday whether that spending has pushed growth any higher than 2%. Looking deeper into the results, the key trend to watch will be customer traffic, which fell 2.2% in the U.S. over the last 12 months.

Making money

Investors were treated to solid earnings growth from the restaurant chain last year despite the fact that commodity costs soared and sales gains slowed. In a tough environment for the industry, operating income margin jumped to 43% of sales in 2018 from 39% a year ago. That success put McDonald's well ahead of rivals like Yum Brands and Chipotle Mexican Grill

The profitability expansion came almost entirely from a refranchising initiative that's already delivered most of the extra profits that investors can expect to see. That means further gains will be harder to come by. Still, the company is targeting a modest profitability uptick again in 2019, to the mid-40% range, as menu prices rise and offset an expected 2% commodity inflation. Shareholders should see evidence of that strength in the key financial metrics of operating margin and restaurant-level profit margin.

Cash returns

McDonald's is spending $1.6 billion upgrading its U.S. stores this year in what amounts to its most aggressive real estate spending spree to date. Yet its efficient business model should have no problem supporting massive cash returns to shareholders at the same time.

Specifically, executives are aiming for $9 billion of returns through share repurchases and dividend payments. That result would edge past last year's $8.5 billion outlay and push the chain over management's three-year goal of returning $25 billion to investors from 2017 through 2019. If market share trends hold steady internationally and begin improving in the U.S., as management hopes they will, then McDonald's will be in a position to issue a similarly aggressive outlook for spiking cash returns in 2020 and beyond.

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Demitrios Kalogeropoulos owns shares of Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool has a disclosure policy.