McDonald's Q3 Earnings Beat, Comps Up; Fx Issues Persist

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McDonald's CorporationMCD posted better-than-expected third quarter 2015 results wherein its earnings and revenues beat the Zacks Consensus Estimate. Global comps matched the company's expectations. After consistent decline in global comps over the past few quarters, McDonald's posted positive comps in the third quarter driven by solid comps at all its segments.

The upside reflects the effects of the turnaround plan announced by Steve Easterbrook - its Chief Executive Officer - in May 2015. However, currency headwinds continued to take a toll on profits.

The company stated that it expects comps to be positive in all segments in the fourth quarter.

Earnings and Revenue Discussion

The company posted earnings per share of $1.40 that beat the Zacks Consensus Estimate of $1.27 by 10%. Including the impact of foreign exchange impact, it grew 28% year over year. Meanwhile, in constant currencies, it grew 44% on a year-over-year basis. The upside reflects decline in total costs and expenses and lower share count.

McDonald's Corporation - Earnings Surprise | FindTheBest

Revenues of $6.62 billion declined 5% year over year due to currency headwinds. However, in constant currencies, it grew 7% year over year driven by comps growth at all its segments. Meanwhile, it beat the Zacks Consensus Estimate of 6.44 billion by 2.7%.

Behind the Headlines Numbers

In the quarter, revenues from company-operated restaurants declined approximately 7% to $4.28 billion. Revenues from franchise-operated restaurants declined 2.5% to $2.33 billion.

Global comps grew 4% that compared favorably with 0.7% decline in the prior quarter. The upside reflects positive comps at all its segments.

Beginning Jul 1, 2015, the company began operating under four new segments. These new segments are: U.S. - the company's largest segment, International Lead Markets - mature markets which include Australia, Canada, France, Germany and the UK; High-Growth Markets - markets with high restaurant expansion and franchising potential including China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands, and Foundational Markets - the remaining markets in McDonald's system.

After posting comps decline for two consecutive quarters, U.S. comps increased 0.9% in the third quarter. The upside reflects introduction of the new Premium Buttermilk Crispy Chicken Deluxe sandwich and return of the iconic Egg McMuffin to breakfast items.

However, segment operating income declined 1% due to incremental investment in wages and benefits for all eligible company-operated restaurant employees. The company also stated that going forward, improving customer traffic remains a top priority for the segment.

Meanwhile, comps in International Lead Markets segment grew 4.6% driven by strong performance in Australia, the U.K. and Canada and positive results in Germany. The upside reflects multiple menu, service and value initiatives throughout most of the segment that led to positive consumer response. However, owing to negative currency impact, operating income fell 11%. In constant currency, it was up 5%.

Comps grew 8.9% in High Growth Markets driven by strong comps in China as a result of the emphasis on value and breakfast. Comps in China had been suffering since Jul 2014 due to the impact of food safety issues. Positive performance in most of the other markets also drove the upside. Including foreign currency impact, operating income grew 39%. It was up 68% in constant currency.

Total operating costs and expenses declined approximately 6% year over year to $13.8 billion. Total operating income fell 15% owing to a decline in revenues.

Positive Comps Expectation for Q4

McDonald's expects to post positive comps at all its segments in the fourth quarter as well. Comps in the third quarter at all its key regions improved considerably. It seems that the company has started to reap the benefits of its efforts to return to positive comps. The company is focusing on product innovation, offering a value menu and rolling out more limited-time offerings.

Also, the company is working on trimming complicated menus to speed up service and focusing on order accuracy through new operational procedures and training programs. All these are expected to help the company to achieve expected results. Moreover, the roll out of an all day breakfast in October is expected to boost traffic.

McDonald's has a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked stocks in the same industry include Arcos Dorados Holdings Inc. Cla ARCO , Bob Evans Farms, Inc. BOBE and Carrols Restaurant Group, Inc. TAST . All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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