McDonald’s Corp. (MCD) 3Q23 Review | Strongly Positioned in Potential Macroeconomic Slowdown

McDonald’s Corp. (MCD) reports 3Q23 earnings on October 30. Barclays released the earnings review on OCT 30.

Stock Rating：Overweight

Price (27 Oct 23): $255.76

Price Target: $315.00

Adj. EPS was $3.19, up 19% y-y, relative to Barclays' $3.03 & consensus $3.01. Guidance was not provided. WW comp was 8.8%, relative to Barclays' estimate & consensus at 7.9%, with each region in-line to above expectation. Specifically, US comp was 8.1% (vs. Barclays' 7.5% & consensus 7.6%), driven by strategic menu price increases, mitigated by modest negative traffic, though the twoyear traffic still positive. The sub-$45k household was the weakest, mitigated by higher incomes, where MCD benefits from trade-down. Outside the US, IOM comp was 8.3% (vs. Barclays' 8.5% & consensus 8.2%) led by the UK, Germany & Canada. And IDL comp was 10.5% (vs. Barclays' 7.5% & consensus 8.0%), with strength in all geographies.

As for profitability, WW franchise margins were 84.5%, up ~50bps, vs. consensus 84.4%. In the US, margins were 82.5%, up ~110bps, vs. consensus 82.1%. In IOM, margins were 82.8%, down ~10bps, vs. consensus 83.0%. In IDL, margins were 99.0%, up ~20bps, vs. consensus 98.8%. And WW restaurant margin was 16.5%, up ~30bps, vs. consensus 15.8%. In terms of the greatest deltas to EPS relative to consensus, lower-than-expected SG&A was ~$0.08 tailwind. Otherwise, FX was a $0.08 tailwind. As for cash usage, MCD returned ~$2.2b, including ~$1.1b in share repo & ~$1.1b in quarterly dividend.

Macro uncertainty persists, and for a variety of reasons, management continues to expect top line to moderate. Efforts to temper expectations are nothing new, though valid, with drivers including fewer tailwinds from a post-COVID recovery, easing inflation and therefore menu pricing, & potential for incremental macro headwinds. Looking at profits, guidance is for adj. operating margin at ~47%, up from the prior ~46%, driven by lower SG&A. And such assumes ongoing targeted & temporary $100-150m of support for franchisees in need based on acute inflationary headwinds, led by Europe. With that said, management expects to be judicious with menu pricing. SG&A is expected at 2.2%, tempered from the prior 2.2-2.3% of system sales, relative to ~2.4x in ‘22.