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Taking a Closer Look at McDonald’s 3Q15 Results: Some Concerns

Adam Jones

McDonald's 3Q15 Earnings Analysis: Is the Company Turning Around?

(Continued from Prior Part)

McDonald’s 3Q15 results

During the quarter, McDonald’s (MCD) reported a revenue of $6.6 billion, which was still down from $6.9 billion in the corresponding quarter in 3Q14. But this 5.3% decline in revenue was better than the 8% decline over the past four quarters, and it seems that the tide is turning for the company. Let’s look at the operating margin performance for the quarter. Currently, McDonald’s forms about 0.3% of the First Trust Consumer Discretionary Alpha Fund (FXD).

Operating margin

  • Operating margins for the quarter grew from 29.7% in 3Q14 to 30.7% in 3Q15.
  • Margins from the US division are expected to be hit by more than 2% for fiscal 2015 as a result of an increase in wages announced earlier this year.
  • Beef price inflation was only 1% in the United States in 3Q15. Beef prices have also impacted Yum! Brands (YUM), Wendy’s (WEN), and Texas Roadhouse (TXRH).
  • Commodity costs increased 0.5% overall in the International Lead Markets.
  • But the company increased its prices by 2% during the quarter to mitigate price increases.
  • In 3Q15, China’s same-store sales were expected to bounce back, as they had been affected by a supplier issue. Since China reported a strong comeback, it also helped McDonald’s margins grow during the quarter.

Some concerns

  • 3Q15 was also affected by a stronger US dollar, and the company expects an impact of $0.08 to $0.10 per share in the fourth quarter.
  • Wage inflation pressures in the United States should remain, and there are also possibilities of wage increases mandated by individual states.

With these results, we’ll now look at the company’s valuation multiple and compare it with peers in the next part of this series.

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