McDonald’s fourth quarter revenue was flat at $6.4bn slightly shy of market forecasts. Takings at US restaurants were down by 1.4%, with a rise in footfall not enough to offset a fall in average order value.
International performance was mixed, with notable weakness in the UK.
Operating income rose by 2% to $2.9bn.
Free cash flow for the full year fell from $7.3bn to $6.7bn reflecting a decline in cash generation and increased capital expenditure (capex).
Payouts to shareholders through dividends and share buybacks increased 1.4% to $7.7bn.
In 2025 McDonald’s expects to make net additions of 1,800 restaurants worldwide and for operating margins to land in the mid-to-high forties (2024: 45.2%). Capex is expected to rise from $2.8bn to between $3.0bn-$3.2bn.
The shares rose 5% in early trading.
Our view
McDonald’s fourth quarter numbers were a little weaker than expected. However, the market has responded positively to a return to visitor growth in the all-important US market, which we think is a sign that a shift to a more value-focused menu is working.
If it hadn’t been for a food poisoning scare earlier in the period, results would likely have been stronger. Value is front and centre of the group’s plan for 2025 so it’s important that the rise in customer numbers develops as the year progresses.
The Group’s scale and efficiency, combined with easing cost pressures, leave it well-placed to deliver these initiatives, but some execution risk remains.
The largely franchised model is an efficient operation, with McDonald's off the hook for many of the typical restaurant running costs. Cash conversion in excess of 80% means the vast majority of profits feed into cash for the business to either spend or return to shareholders.
Strong cash flows give it headroom to help cope with bumps in the road and continue its expansion plans, with 1,800 net restaurant openings expected this year. The bias in openings towards franchised operations should help margins once the stores are running at full pelt.
There’s a greater focus on international expansion too. The group’s global footprint means it’s not too exposed to economic conditions in one particular region. It’s also targeting demand for western brands in developing markets, with China being a particular focus. The Chinese economic outlook remains shaky, so there is a risk that revenues here ramp up slower than expected.
Full-year operating margins in the mid-forties are another positive and there’s scope for further progression this year if it can keep volumes moving in the right direction.
McDonald's is also lugging around a hefty debt pile. Interest costs are expected to rise 4-6% this year as a result of higher debt balances and interest rates. The group enjoys strong cash generation but given the increased cost of debt, we think paying some of this down should be a priority and we’re not expecting a step-change in the level of payouts to shareholders. Of course, no payments can be assured.
We think McDonald’s brand strength remains key to navigating peaks and troughs in demand. Damage from The E.coli scare looks to be contained and McDonald’s is well placed to extend its share of the fast-food market. With the valuation above the long-term average however, there is some pressure to deliver.
Environmental, Social & Governance Risks
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
McDonald’s overall management of material ESG issues is average according to Sustainalytics. But there are some product governance concerns including controversy over an outbreak of E.coli. There are also question marks over labour relations where it has been the subject of multiple lawsuits and in major controversies. The company discloses sustainability information in its Purpose & Impact Progress Summary; however, there is no evidence that it follows ESG reporting standards.
McDonald’s key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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