This is a summary of the second quarter fiscal 2008 earnings call conducted by McDonald’s Corporation (MCD) on July 23, 2008
Management:
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President, Chief Operating Officer, Director: Ralph Alvarez
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Chief Financial Officer, Corporate Executive Vice President: Peter J. Bensen
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Vice President, Investor Relations: Mary Kay Shaw
Key Investor Issues:
- Revenues went up by 4% from $5.8 billion in the prior period to $6.07 billion
- Earnings were $1.2 billion or $1.04 compared to a loss of $717 million or 60 cents per share in the prior period.
- The Company repurchased 13.3 million shares of its stock for $788 million and paid $422 million in quarterly dividends
Half year highlights:
- Revenues increased 5% to $11.69 billion compared to the comparable period last year
- Net income was $2.1 billion or $1.85 a share compared to $50.7 million or 4 cents a share in 2007.
Second Quarter Highlights:
Revenues went up by 4% from $5.8 billion in the prior period to $6.07 billion as comparable sales increased 6.1%.
- Comparable sales for the quarter were up 3.4%, of which 75% came from increased guest counts.
- Comparable sales increases around the world helped drive total margin dollars to $2.2 billion in the second quarter, up 5% in constant currencies.
- Franchise margins represented about two-thirds of this amount and accounted for nearly all of the increase.
As a percent of revenues, franchise margins increased 80 basis points to 82.3% benefiting from last year’s Latin America transaction but was partly offset by the impact of the refranchising strategy.
- Operating income was nearly $800 million, an increase of 6% over last year.
- Consolidated operating income excluding the impact of the 2007 Latin America transaction increased more than $240 million, or 17%. That’s 9% in constant currencies.
- The three-tier pricing strategy contributes to that the company’s success, and the dollar menu, which represents about 14% of sales, is an important part of this strategy.
Earnings were $1.2 billion or $1.04 compared to a loss of $717 million or 60 cents per share in the prior period as 44% increase after adjusting for the impact of the 2007 Latin America transaction.
- These results included a $160 million non-operating gain, or 10 cents per share from the previously announced sale of the minority interest in Pret A Manger, a U.K. based quick-service sandwich concept.
- Company-operated margins as a percent of sales rose 10 basis points to 17.7%, driven primarily by strong sales growth worldwide, offset by rising commodity and other costs.
- G&A was up 1%, but declined 3% in constant currencies, as lower expenses in Latin America offset costs related to the biannual worldwide owner-operator convention.
- The firm continued to generate a significant amount of cash, and repurchased nearly $800 million of stock and paid a dividend of $420 million in the quarter.
Geographical segment Analysis:
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Europe: comparable sales growth contributed to company-operated margins of 18%, the same high level as last year.
- The robust sales performance was offset by inflationary commodity and labor cost pressures throughout Europe.
- Beef prices in Europe rose 6% and chicken increased 8%.
Comp sales for the quarter were up 7.4%, on top of a 7.8% increase for the second quarter 2007, and operating income increased 13% in constant currencies.
- More than 70% of the European restaurants offer some form of extended hours.
- Nearly half of the European restaurants now have drive-thrus and drive-thrus represent 45% of sales in those restaurants.
- The U.K. is also planning to reimage another 200-plus restaurants in 2008 and 2009, with an emphasis on our drive-thru locations now.
- Even in spite of declining consumer confidence in the U.K., sales, guest counts, and margins continued to grow in the second quarter and were a strong contributor to overall results.
- The firm will keep an eye towards Russia, Europe’s high potential market, where it is in its fifth year of consecutive double-digit monthly comp sales growth.
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APMEA continued strong comparable sales in virtually every country contributed to the company-operated margins rising 140 basis points.
- Australia led this performance with its new chicken offerings and longer operating hours, helping to extend its string of double-digit comp sales increased to 12 months.
- China also performed well in the quarter, with double-digit comparable sales increases and margin expansion. Breakfast, extended hours, and relevant promotions contributed to this result.
- Comparable sales up 8.8% on top of a 10.9% increase in second quarter last year, and operating income increased 22% in constant currencies.
Margins were up, income growth remains strong, and returns have increased significantly during the last three years.
- This market success is also the result of continued focus on operations improvement and momentum at breakfast, driven by Espresso Pronto coffee and a series of menu extensions.
- In Japan, sales and guest counts continued to grow, despite a flat and formal eating out market. - The addition of several new items to the YEN100 menu, including premium roast coffee, chicken, and desserts is resonating with customers
- In China, one of the high potential markets, the firm is quickly scaling best practice initiatives, including extended hours, breakfast, and value.
- The benefit of extended hours can also be seen in the breakfast business, which has grown to 7% of China’s sales, a 50% increase since the launch in early 2007.
Commodity cost increases:
- The firm is experiencing significant commodity cost increases as beef cost in the U.S. rose 2% and chicken was up 6%.
- For the full year, our outlook for chicken is to rise in that same 5% to 6% range, and for beef to increase 8% to 9%.
- However the company has a competitive advantage in both ability to leverage economies of scale and global supply chain.
- The menu is also very diversified, no single commodity makes up more than 15% of the overall food bill.
- The firm’s margins are among the highest in the industry.
