Business Overview
McDonald's Corporation (MCD) has a rich history as one of the world's most iconic and recognizable fast-food brands. Founded in 1940 by brothers Richard and Maurice McDonald, the company has grown to become a global powerhouse, serving millions of customers daily across more than 42,410 restaurants in over 100 countries as of June 30, 2024.
The company's success is rooted in its ability to adapt to changing consumer preferences and industry dynamics while maintaining the core principles that have made the McDonald's brand so enduring. The McDonald brothers pioneered the concept of the "Speedee Service System," which revolutionized food preparation and laid the groundwork for the fast-food industry. In 1948, they closed their restaurant for several months to streamline their menu, focusing on burgers, fries, and beverages. This pivotal decision allowed them to reduce preparation time and labor costs, passing those savings on to customers.
The 1950s and 1960s saw significant growth for McDonald's as it expanded across the United States. In 1961, Ray Kroc, a milkshake mixer salesman, bought the rights to the McDonald's brand and rapidly franchised the concept. Under Kroc's leadership, McDonald's became synonymous with fast, affordable, and consistent food service. The company pioneered innovations like the Drive-Thru and established the Ronald McDonald children's charity, further solidifying its place in American culture.
Over the decades, McDonald's has navigated economic downturns, evolving dietary trends, and intensifying competition, consistently delivering strong financial performance and shareholder returns. The company has repeatedly adapted its menu, marketing, and operations to remain a dominant player in the fast-food industry, addressing challenges such as evolving consumer preferences, health and nutrition concerns, and competitive pressures.
Financials
In the most recent fiscal year ended December 31, 2023, McDonald's reported total revenue of $25.49 billion, a 10% increase from the prior year. Net income for the period stood at $8.47 billion, with diluted earnings per share of $11.56. The company's operating cash flow was a robust $9.61 billion, allowing it to fund capital expenditures of $2.36 billion and return $4.53 billion to shareholders through dividends and share repurchases. Free cash flow for the fiscal year 2023 was $7.25 billion.
For the most recent quarter ended June 30, 2024, McDonald's reported total revenues of $6.49 billion, which was relatively flat compared to the prior year quarter. Net income for the quarter was $2.02 billion, a decrease of 12% (11% in constant currencies) compared to the same period last year. Operating cash flow for the quarter stood at $1.69 billion, with free cash flow of $1.06 billion.
McDonald's financial strength is underpinned by its highly franchised business model, with approximately 95% of its restaurants operated by franchisees as of June 30, 2024. This model provides the company with a stable and predictable revenue stream, as franchisees pay rent, royalties, and other fees based on a percentage of sales. The company's focus on franchising has also allowed it to rapidly expand its global footprint while maintaining tight control over operations and brand integrity.
Geographically, McDonald's operates through three main reportable segments:
1. United States (U.S.): This is McDonald's largest market, with approximately 95% of restaurants being franchised as of June 30, 2024. For the six months ended June 30, 2024, comparable sales in the U.S. increased by 0.9%, driven by average check growth from strategic menu price increases and continued digital and delivery growth, though negatively impacted by negative comparable guest counts.
2. International Operated Markets (IOM): This segment comprises markets or countries where McDonald's owns and operates as well as franchises restaurants, including Australia, Canada, France, Germany, Italy, Poland, Spain, and the U.K. This segment is 89% franchised as of June 30, 2024. For the six months ended June 30, 2024, comparable sales in the IOM segment increased by 0.7%, with positive comparable sales in most markets like Poland and Germany, partly offset by negative comparable sales in France.
3. International Developmental Licensed Markets & Corporate (IDL): This segment includes the results of over 75 countries, as well as Corporate activities. It is 98% franchised as of June 30, 2024 and includes equity method investments in China and Japan. For the six months ended June 30, 2024, comparable sales in the IDL segment decreased by 0.8%, impacted by the ongoing war in the Middle East and negative comparable sales in China.
In terms of liquidity, McDonald's had $4.58 billion in cash and cash equivalents as of December 31, 2023. The company's long-term debt stood at $37.15 billion, with current debt of $2.19 billion. The debt-to-equity ratio was -8.12, while the current ratio and quick ratio were 1.16 and 1.06, respectively, as of December 31, 2023.
Strategy and Adaptation
One of the key drivers of McDonald's success has been its ability to adapt to changing consumer preferences and industry trends. In recent years, the company has invested heavily in digital initiatives, including mobile ordering, delivery, and loyalty programs, to enhance the customer experience and drive sales. These efforts have proven successful, with the company's digital sales reaching nearly $8 billion in 2023, or 30% of total revenue.
McDonald's has also remained responsive to evolving dietary trends, expanding its menu offerings to include more health-conscious options, such as salads, wraps, and plant-based burgers. While these items may not drive the same level of profitability as the company's core menu items, they demonstrate McDonald's commitment to meeting the diverse needs of its customer base.
Despite its successes, McDonald's has not been immune to the challenges facing the broader quick-service restaurant (QSR) industry. In 2023, the company experienced a slowdown in global comparable sales growth, as macroeconomic factors such as inflationary pressures and shifting consumer spending patterns impacted the industry as a whole.
In response, McDonald's has doubled down on its focus on value and affordability, rolling out successful initiatives like the $5 Meal Deal in the United States and the McSmart platform in several international markets. These efforts have helped the company maintain its position as the value leader in the industry and have contributed to its ability to gain market share in many of its key markets.
Future Outlook
Looking ahead, McDonald's remains well-positioned for continued success, despite acknowledging that its performance so far in 2024 has fallen short of expectations, with negative global comparable sales for the third quarter. However, the U.S. market has been a bright spot, with positive comparable sales and outperforming the overall QSR industry in both comparable sales and guest counts for the quarter.
The company's long-term growth strategy, known as "Accelerating the Arches," is centered around four key pillars: maximizing marketing, committing to the core menu, doubling down on digital and delivery, and accelerating restaurant development. This multifaceted approach is designed to drive sustainable growth and maintain the company's competitive edge in the rapidly evolving QSR landscape.
McDonald's has reaffirmed its financial outlook for 2024, assuming the recent public health situation (E. coli cases) does not have a material impact on the business. For the full year 2024, the company expects interest expense to increase by approximately 11% and the adjusted effective tax rate to be around 21%.
In a show of confidence in its long-term prospects, McDonald's raised its quarterly dividend by 6% to $7.08 per share annually, marking the 48th consecutive dividend increase. The company remains focused on investing in growth opportunities and returning excess free cash flow to shareholders through dividends and share repurchases.
Conclusion
Despite the occasional headwinds, McDonald's has consistently demonstrated its ability to adapt and thrive. The company's strong brand recognition, global scale, and disciplined execution have allowed it to navigate industry challenges and deliver consistent returns to shareholders over the long term. While the company faces some near-term challenges, its focus on digital innovation, menu optimization, and value offerings position it well for future growth. As McDonald's continues to evolve and innovate, investors can likely expect the company to remain a dominant force in the fast-food industry for years to come.