McDonald’s Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Comparisons are with the corresponding 2022 periods unless stated otherwise. Financial amounts are in U.S. dollars.
Business context and performance
McDonald’s operated 41,198 restaurants at quarter-end, approximately 95% franchised. Its business combines sales at company-operated restaurants with rent, royalties and fees from franchised restaurants.
- Global comparable sales increased 8.8% in Q3 and 11.0% year to date. Q3 growth was 8.1% in the U.S., 8.3% in International Operated Markets and 10.5% in International Developmental Licensed Markets.
- Systemwide sales increased 11% in both periods (10% and 12%, respectively, excluding currency translation). Management cited menu pricing, restaurant execution, marketing, digital and delivery growth.
- Digital channels accounted for over 40% of Systemwide sales in the top six markets in Q3, nearly $9 billion. Those markets had over 57 million active loyalty members.
Financial results and liquidity
| Metric | Q3 2023 | Nine months 2023 |
|---|---|---|
| Revenue | $6.69 billion, up 14% (11% constant currency) | $19.09 billion, up 11% (11% constant currency) |
| Operating income | $3.21 billion, up 16% | $8.84 billion, up 30% |
| Net income | $2.32 billion, up 17% | $6.43 billion, up 50% |
| Diluted EPS | $3.17, up 18% | $8.76, up 52% |
| Operating margin | Not stated directly for Q3 | 46.3%; 47.5% excluding specified charges and gains |
- Nine-month adjusted diluted EPS, excluding specified charges, gains and the 2022 France tax-audit settlement, was $8.99 versus $7.51, up 20% (constant currency).
- Q3 interest expense rose 11%; nine-month interest expense rose 13%, reflecting higher average rates and debt balances.
- Nine-month cash from operations was $7.12 billion, up from $5.19 billion. Capital expenditures were $1.60 billion; operating cash flow less capital expenditures was $5.52 billion.
- At September 30, cash and equivalents were $3.50 billion; current assets were $6.85 billion and current liabilities $4.00 billion. Long-term debt was $37.27 billion, compared with $35.90 billion at year-end 2022. Debt fair value was estimated at $34.0 billion. Shareholders’ equity remained negative at $(4.85) billion.
- Nine-month dividends paid were $3.32 billion and share repurchases were $2.20 billion. In October, the company declared a 10% increase in the quarterly dividend to $1.67 per share.
Changes, unusual items and management outlook
- Growth in operating income and earnings reflected strong sales-driven franchised margins. Franchised margins represented approximately 90% of restaurant margin dollars; company-operated margins also grew, partly offset by inflationary cost pressures.
- 2023 results included $224 million of nine-month pre-tax charges, primarily restructuring costs for the Accelerating the Organization initiative; $220 million had been incurred through September. The company expected about $250 million of such costs for 2023. It also reported $26 million of charges in Q3.
- The prior-year nine-month comparison included $1.281 billion of charges related to the Russia business sale, a $271 million gain on the Dynamic Yield sale, and $537 million of nonoperating expense from settling a French tax audit. These items materially affect reported year-over-year comparisons.
- Management’s 2023 outlook included operating margin of about 46%, or about 47% excluding restructuring-related charges; SG&A of about 2.2% of Systemwide sales; interest expense growth of 12%–13%; and an effective tax rate of 19%–21%.
- Management expected capital expenditures of $2.2–$2.4 billion, about 1,900 restaurant openings and approximately 1,500 net additions in 2023. It forecast nearly 1.5% Systemwide sales growth from net unit expansion and a free cash flow conversion rate near 90%.
- Management identified inflation, commodity and labor costs, foreign exchange, supply-chain disruption, geopolitical conditions, competition, franchisee execution, food safety, regulation, litigation and cybersecurity as risks. The filing reported no material change in market-risk disclosures or legal-proceedings disclosures from the 2022 Form 10-K. No subsequent events requiring disclosure were reported.
Important facts for investors to verify
- Whether comparable-sales momentum and pricing can be sustained without weakening customer traffic or value perception.
- How much reported earnings growth reflects ongoing operations versus the unusual 2022 Russia, Dynamic Yield and tax-audit items.
- Progress and total costs of the restructuring initiative, including future costs for the Global Business Services strategy, which the company said could not yet be estimated.
- Debt growth, interest costs, cash generation and the capacity to fund restaurant investment, dividends and repurchases.
- Delivery, labor, commodity, supply-chain, currency and geopolitical developments and their impact on margins and franchisee health.