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| MCD > SEC Filings for MCD > Form 10-Q on 5-May-2009 | All Recent SEC Filings |
5-May-2009
Quarterly Report
Overview
The Company franchises and operates McDonald's restaurants. Of the 32,060 restaurants in 118 countries at March 31, 2009, 25,578 were operated by franchisees (including 18,487 operated by conventional franchisees, 2,957 operated by developmental licensees and 4,134 operated by foreign affiliated markets (affiliates) - primarily in Japan) and 6,482 were operated by the Company. Under our conventional franchise arrangement, franchisees provide a portion of the capital required by initially investing in the equipment, signs, seating and dιcor of their restaurant businesses, and by reinvesting in the business over time. The Company owns the land and building or secures long-term leases for both Company-operated and conventional franchised restaurant sites. This maintains long-term occupancy rights, helps control related costs and assists in alignment with franchisees. Under our developmental license arrangement, licensees provide capital for the entire business, including the real estate interest, while the Company has no capital invested. In addition, the Company has an equity investment in a limited number of foreign affiliates that invest in real estate and operate or franchise restaurants within a market.
We view ourselves primarily as a franchisor and continually review our mix of Company-operated and franchised (conventional franchised, developmental licensed and affiliated) restaurants to deliver a great customer experience and drive profitability. In most cases, franchising is the best way to achieve both goals. Although direct restaurant operation is more capital-intensive relative to franchising and results in lower restaurant margins as a percent of revenues, Company-operated restaurants are important to our success in both mature and developing markets. In our Company-operated restaurants, and in collaboration with our franchisees, we further develop and refine operating standards, marketing concepts and product and pricing strategies, so that only those that we believe are most beneficial are introduced Systemwide. In addition, we firmly believe that owning restaurants is paramount to being a credible franchisor and essential to providing Company personnel with restaurant operations experience. Our Company-operated business also helps to facilitate strategic changes in restaurant ownership.
The Company's revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from restaurants licensed to affiliates and developmental licensees include royalties based on a percent of sales, and generally include initial fees. Fees vary by type of site, amount of Company investment, if any, and local business conditions. These fees, along with occupancy and operating rights, are stipulated in franchise/license agreements that generally have 20-year terms.
The business is managed as distinct geographic segments. Significant reportable segments include the United States (U.S.), Europe, and Asia/Pacific, Middle East and Africa (APMEA). In addition, throughout this report we present "Other Countries & Corporate" that includes operations in Canada and Latin America, as well as Corporate activities. The U.S., Europe and APMEA segments account for 37%, 38% and 20% of total revenues, respectively.
In February 2009, the Company sold its minority ownership interest in Redbox Automated Retail, LLC (Redbox), to Coinstar, Inc. (Coinstar), the majority owner, for a value of at least $134 million. In connection with the sale, the Company received initial consideration valued at $51.6 million consisting of 1.5 million shares of Coinstar common stock at an agreed value of $41.6 million and $10 million in cash with the balance of the purchase price deferred. In connection with the transaction, the Company recognized a nonoperating pretax gain of $76.5 million in the first quarter 2009. The deferred consideration is payable in cash and/or Coinstar common stock, at Coinstar's option subject to certain limitations.
Strategic Direction and Financial Performance
McDonald's customer-centered Plan to Win - which is focused on being better, not just bigger - provides a common framework for our restaurants yet allows for local adaptation. The Plan facilitates the execution of multiple initiatives surrounding the five factors of exceptional customer experiences - people, products, place, price and promotion. Through the execution of these initiatives, we have enhanced the McDonald's experience for customers worldwide, growing sales and guest counts in each of the last five years. This Plan, coupled with financial discipline, has delivered strong results for shareholders. Our continued commitment and ability to deliver a relevant restaurant experience that provides consumers with a broad range of quality menu choices, affordable prices and unmatched convenience is driving operating performance. In the first quarter 2009, our results were driven by strong comparable sales across all geographic segments despite one less trading day in the quarter due to 2008 being a leap year.
In the U.S., the business continues to gain market share as consumers visit McDonald's more often for the classic taste of core products, convenient locations and operating hours, and compelling value across the menu. These factors, combined with increased sales of chicken, breakfast and beverages, contributed to a comparable sales increase of 4.7% for the first quarter.
Europe delivered solid first quarter comparable sales of 3.2% despite the shift in timing of Easter-related school and business holidays from March 2008 to April 2009. Our European business continues to gain market share as tiered-pricing menus, seasonal food events and day-part expansion in the morning and late night hours connect with customers. Europe's locally relevant strategies continue to drive performance, and the segment is expected to strengthen as the year progresses.
APMEA reported strong first quarter comparable sales of 5.5% and an 11% constant currency increase in operating income driven by everyday affordability, menu choice and convenience.
The Company remains committed to returning value to shareholders through share repurchases and dividends. During the first quarter 2009, the Company repurchased 14.6 million shares of its stock for $823.2 million and paid a quarterly dividend of $0.50 per share or $553.4 million. For the full years 2007 and 2008 and first quarter of 2009 combined, the Company returned $12.9 billion toward the $15 billion to $17 billion targeted cash return to shareholders by the end of 2009. Given our strong balance sheet and operating performance, we fully expect to meet the target this year.
The Company continues to optimize its restaurant ownership mix, cash flow and returns through its refranchising strategy. The Company expects to refranchise 1,000 to 1,500 Company-operated restaurants between 2008 and 2010, primarily in its major markets. For the full year 2008 and first quarter of 2009 combined, the Company refranchised about 770 restaurants. This shift to a greater percentage of franchised restaurants is expected to negatively impact consolidated revenues as Company-operated sales shift to franchised sales, where we receive rent and/or royalties. In addition, the Company expects a decrease in Company-operated margin dollars and an increase in franchised margin dollars. The impact on margin percentages will vary based on sales and operating costs of refranchised restaurants.
Operating Highlights Included:
Global comparable sales increase of 4.3% despite one less trading day in the quarter due to 2008 being a leap year
Combined operating margin increased 150 basis points (80 basis points in constant currencies) to 27.6%
Net income per share was $0.87, up 7% (17% in constant currencies), including a $0.04 per share gain from the sale of the Company's minority interest in Redbox and $0.08 per share of negative impact from foreign currency translation
Returned nearly $1.4 billion to shareholders through share repurchases and dividends
Outlook
While the Company does not provide specific guidance on net income per share, the following information is provided to assist in forecasting the Company's future results.
Changes in Systemwide sales are driven by comparable sales and net restaurant unit expansion. The Company expects net restaurant additions to add nearly 2 percentage points to 2009 Systemwide sales growth (in constant currencies), most of which will be due to the 709 net traditional restaurants added in 2008.
The Company does not generally provide specific guidance on changes in comparable sales. However, as a perspective, assuming no change in cost structure, a 1 percentage point increase in comparable sales for either the U.S. or Europe would increase annual net income per share by about 3 cents.
With about 75% of McDonald's grocery bill comprised of 10 different commodities, a basket of goods approach is the most comprehensive way to look at the Company's commodity costs. For the full year 2009, the total basket of goods is expected to rise about 5% to 5.5% in the U.S. and about 4% to 4.5% in Europe with more of this pressure occurring in the first half of the year. Some volatility may be experienced between quarters in the normal course of business.
The Company expects full-year 2009 selling, general & administrative expenses to decline, in constant currencies, although fluctuations will be experienced between quarters due to certain items in 2008 such as the biennial Worldwide Owner/Operator Convention and the Beijing Summer Olympics.
Based on current interest and foreign currency exchange rates, the Company expects interest expense in 2009 to decrease approximately 5% to 10% compared with 2008. Interest income in 2009 is expected to decrease about 75% compared with 2008 primarily due to expected lower average interest rates.
A significant part of the Company's operating income is generated outside the U.S., and about 40% of its total debt is denominated in foreign currencies. Accordingly, earnings are affected by changes in foreign currency exchange rates, particularly the Euro, British Pound, Australian Dollar and Canadian Dollar. Collectively, these currencies represent approximately 70% of the Company's operating income outside the U.S. If all four of these currencies moved by 10% in the same direction compared with 2008, the Company's annual net income per share would change by about 12 to 15 cents. Due to the recent strengthening of the U.S. Dollar relative to virtually all foreign currencies, full year 2009 revenues and net income per share will likely be negatively impacted by foreign currency translation. If foreign currency rates approximate current levels, currency translation is expected to negatively impact full year 2009 revenues and net income per share by about $2.3 billion and $0.32 per share, respectively.
The Company expects capital expenditures for 2009 to be approximately $2.1 billion. About half of this amount will be reinvested in existing restaurants while the rest will primarily be used to open about 1,000 restaurants (950 traditional and 50 satellites). The Company expects net additions of about 650 restaurants (750 net traditional additions and 100 net satellite closings). These restaurant numbers include new unit openings (about 300 restaurants) in affiliated and developmental licensed markets, such as Japan and Latin America, where the Company does not fund any capital expenditures.
For 2007 through 2009, the Company expects to return $15 billion to $17 billion to shareholders through share repurchases and dividends, subject to business and market conditions. For the full years 2007 and 2008 and first quarter of 2009 combined, the Company returned $12.9 billion to shareholders.
The Company continually reviews its restaurant ownership structures to optimize cash flow and returns and to enhance local relevance. The Company expects to refranchise 1,000 to 1,500 Company-operated restaurants between 2008 and 2010, primarily in its major markets, and will continue to utilize its developmental license strategy. For the full year 2008 and first quarter of 2009 combined, the Company refranchised about 770 restaurants, primarily in its major markets.
The Following Definitions Apply to These Terms as Used Throughout This Form 10-Q:
Constant currency results exclude the effects of foreign currency translation and are calculated by translating current year results at prior year average exchange rates. Management reviews and analyzes business results in constant currencies and bases certain incentive compensation plans on these results because they believe this better represents the Company's underlying business trends.
Systemwide sales include sales at all restaurants, whether operated by the Company or by franchisees. While franchised sales are not recorded as revenues by the Company, management believes the information is important in understanding the Company's financial performance because these sales are the basis on which the Company calculates and records franchised revenues and are indicative of the financial health of the franchisee base.
Comparable sales represent sales at all restaurants and comparable guest counts represent the number of transactions at all restaurants, including those operated by the Company or by franchisees, in operation at least thirteen months including those temporarily closed. Comparable sales exclude the impact of currency translation. Some of the reasons restaurants may be temporarily closed include reimaging or remodeling, rebuilding, road construction and natural disasters. Management reviews the increase or decrease in comparable sales and comparable guest counts compared with the same period in the prior year to assess business trends. The number of weekdays and weekend days, referred to as the calendar shift/trading day adjustment, can impact our comparable sales and guest counts. In addition, the timing of holidays can also impact comparable sales and guest counts.
CONSOLIDATED OPERATING RESULTS
Quarter Ended
Dollars in millions, except per share data March 31, 2009
% Increase /
Amount (Decrease)
Revenues
Sales by Company-operated restaurants $ 3,484.7 (13 )
Revenues from franchised restaurants 1,592.7 (1 )
Total revenues 5,077.4 (10 )
Operating costs and expenses
Company-operated restaurant expenses 2,920.5 (13 )
Franchised restaurants - occupancy expenses 296.7 (1 )
Selling, general & administrative expenses 497.3 (10 )
Impairment and other charges, net 1.2 n/m
Other operating (income) expense, net (38.7 ) 4
Total operating costs and expenses 3,677.0 (11 )
Operating income 1,400.4 (4 )
Interest expense 120.9 (6 )
Nonoperating (income) expense, net (16.4 ) 43
Gain on sale of investment (76.5 ) n/m
Income before provision for income taxes 1,372.4 1
Provision for income taxes 392.9 (6 )
Net income $ 979.5 4
Net income per common share-basic: $ 0.88 6
Net income per common share-diluted: $ 0.87 7
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n/m Not meaningful
Impact of Foreign Currency Translation
While changing foreign currencies affect reported results, McDonald's mitigates exposures, where practical, by financing in local currencies, hedging certain foreign-denominated cash flows, and purchasing goods and services in local currencies. Management reviews and analyzes business results excluding the effect of foreign currency translation and bases certain incentive compensation plans on these results because they believe this better represents the Company's underlying business trends. Results excluding the effect of foreign currency translation (also referred to as constant currency) are calculated by translating current year results at prior year average exchange rates.
IMPACT OF FOREIGN CURRENCY TRANSLATION
In millions, except per share data
Currency
Translation
Benefit /
(Cost)
Quarters Ended March 31, 2009 2008 2009
Revenues $ 5,077.4 $ 5,614.8 $ (642.4 )
Company-operated margins 564.2 659.2 (72.5 )
Franchised margins 1,296.0 1,316.2 (109.0 )
Selling, general & administrative expenses 497.3 552.4 43.0
Operating income 1,400.4 1,462.8 (137.9 )
Net income 979.5 946.1 (86.2 )
Net income per common share - diluted 0.87 0.81 (0.08 )
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Foreign currency translation had a negative impact on consolidated operating results for the quarter as the U.S. Dollar strengthened against most currencies of foreign markets in which the Company operates, primarily the Euro, British Pound, Australian Dollar and Canadian Dollar. The weaker Russian Ruble also had a negative impact on operating results.
Net Income and Diluted Net Income per Common Share
For the first quarter 2009, net income was $979.5 million and diluted net income per common share was $0.87. Results benefited by a $47.4 million, or $0.04 per share, after tax gain on the sale of the Company's minority interest in Redbox. Results were negatively impacted by $0.08 per share due to the effect of foreign currency translation. For the first quarter 2008, net income was $946.1 million and diluted net income per common share was $0.81.
During the first quarter 2009, the Company repurchased 14.6 million shares of its stock for $823.2 million and paid a quarterly dividend of $0.50 per share or $553.4 million.
Revenues
Revenues consist of sales by Company-operated restaurants and fees from restaurants operated by franchisees. Revenues from conventional franchised restaurants include rent and royalties based on a percent of sales along with minimum rent payments, and initial fees. Revenues from franchised restaurants that are licensed to affiliates and developmental licensees include royalties based on a percent of sales, and generally include initial fees.
REVENUES
Dollars in millions
% Inc /
(Dec)
Excluding
% Inc / Currency
Quarters Ended March 31, 2009 2008 (Dec) Translation
Company-operated sales
U.S. $ 1,043.5 $ 1,110.1 (6 ) (6 )
Europe 1,413.7 1,785.6 (21 ) -
APMEA 875.7 895.6 (2 ) 9
Other Countries & Corporate 151.8 207.5 (27 ) (9 )
Total $ 3,484.7 $ 3,998.8 (13 ) -
Franchised revenues
U.S. $ 832.9 $ 786.5 6 6
Europe 534.5 590.0 (9 ) 7
APMEA 133.4 136.8 (2 ) 16
Other Countries & Corporate 91.9 102.7 (11 ) 9
Total $ 1,592.7 $ 1,616.0 (1 ) 7
Total revenues
U.S. $ 1,876.4 $ 1,896.6 (1 ) (1 )
Europe 1,948.2 2,375.6 (18 ) 2
APMEA 1,009.1 1,032.4 (2 ) 10
Other Countries & Corporate 243.7 310.2 (21 ) (4 )
Total $ 5,077.4 $ 5,614.8 (10 ) 2
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Consolidated revenues decreased 10% (increased 2% in constant currencies) for the quarter. The constant currency growth was driven by positive comparable sales in all segments, partly offset by the impact of the refranchising strategy in certain of the Company's major markets. As a result of refranchising, franchised restaurants represent 80% of systemwide restaurants at March 31, 2009 compared with 78% at March 31, 2008.
In the U.S., the decrease in revenues was due to the impact of the refranchising strategy, mostly offset by an increase in comparable sales driven by our iconic core products, market-leading breakfast business, including McCafι coffees, and continued focus on everyday value.
In Europe, the constant currency increase in revenues was primarily due to strong comparable sales in the U.K., France and Russia (which is entirely Company-operated). These increases were partly offset by the impact of the refranchising strategy, primarily in the U.K. and Germany.
In APMEA, the constant currency increase in revenues was primarily driven by strong comparable sales in Australia and expansion in China, partly offset by negative comparable sales in China due to the weak economic environment.
Comparable sales and guest counts for the first quarter 2009 were negatively impacted by about 1 percentage point due to the occurrence of leap year in 2008, while comparable sales and guest counts for first quarter 2008 benefited by about 1 percentage point. The following table presents the percent change in comparable sales for the quarters ended March 31, 2009 and 2008:
COMPARABLE SALES % Increase
Quarters Ended
March 31,*
2009 2008
U.S. 4.7 2.9
Europe 3.2 11.1
APMEA 5.5 9.4
Other Countries & Corporate 4.4 15.3
Total 4.3 7.4
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* On a consolidated basis, comparable guest counts increased 1.0% and 3.2% for the quarters ended March 31, 2009 and 2008, respectively.
The following table presents the percent change in Systemwide sales for the quarter ended March 31, 2009:
SYSTEMWIDE SALES
Quarter Ended
March 31, 2009
% Inc
Excluding
% Inc / Currency
(Dec ) Translation
U.S. 6 6
Europe (13 ) 5
APMEA 4 9
Other Countries & Corporate (12 ) 6
Total (2 ) 6
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The following table presents franchised sales, which are not recorded in the income statement, and the related percentage change for the quarters ended March 31, 2009 and 2008:
FRANCHISED SALES
Dollars in millions
% Inc
Excluding
% Inc / Currency
Quarters Ended March 31, 2009 2008 (Dec ) Translation
U.S. $ 6,253.9 $ 5,803.6 8 8
Europe 3,067.5 3,357.0 (9 ) 8
APMEA 2,280.4 2,128.8 7 10
Other Countries & Corporate 1,177.9 1,296.1 (9 ) 9
Total* $ 12,779.7 $ 12,585.5 2 8
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* Included $2,729.0 million and $2,567.2 million of sales in 2009 and 2008, respectively, on which the Company earns a royalty on sales from developmental licensee restaurants and foreign affiliated markets. The remaining balance of franchised sales is derived from conventional franchised restaurants where the Company earns rent and royalties based on sales.
Restaurant Margins
FRANCHISED AND COMPANY-OPERATED RESTAURANT MARGINS
Dollars in millions
% Inc /
(Dec)
Excluding
% Inc / Currency
Quarters Ended March 31, Percent Amount (Dec) Translation
. . .
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