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McDonald’s Ends a Good Year on a High Note

By Demitri Kalogeropoulos - Feb 1, 2020 at 8:27AM

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The burger giant had some positive news for investors as it enters fiscal 2020.

Investors had some worries coming into the fourth-quarter earnings report for McDonald's (MCD 1.24%), given that the chain had announced unbalanced results in recent months. Its strong global growth numbers were tarnished by a few warning flags in the core U.S. market, which had been showing declining customer traffic for over a year.

On Wednesday, the company didn't announce an end to that traffic slump. But shareholders had plenty to celebrate within its broader results. Let's look at its performance. 

Four friends sharing a fast-food meal.

Image source: Getty Images.

Strong sales trends

Global sales rose 5.9%, which was exactly even with the prior quarter's expansion rate. This market-beating growth rate again came mainly from countries like France, Australia, and China, and easily outpaced the 5% uptick in the U.S. That domestic growth still likely beat rivals like Domino's and Yum! Brands. Yet Starbucks is so far the industry's biggest winner, posting a 6% sales boost supported by 3% higher customer traffic.

That customer traffic metric has been a sore spot for McDonald's, and the weakness carried over into the fourth quarter. But there's a silver lining to note in that traffic losses moderated slightly, landing at 1.9% compared with 2.2% in fiscal 2018. That improvement, plus rising prices, allowed comparable-store sales gains in the U.S. to double to 5% this past year.

Executives highlighted the global increase in traffic, with guest counts rising 1% worldwide compared with a 0.2% uptick in 2018. "We once again served more customers the food they crave," CEO Chris Kempczinski said in a press release, "marking three consecutive years of global comparable guest count growth."

Profits and outlook

McDonald's finances benefited from the strong global growth, with operating income rising 6% after accounting for currency exchange shifts, up to $9.1 billion. Per share earnings improved at a slightly faster pace thanks to management's aggressive stock repurchase plan that reduced the share count by 25 million over the past year. In addition to that $5 billion in stock buybacks, Mickey D's delivered $3.6 billion to shareholders through dividends to cap off a three-year, $25 billion cash-return binge.

The fast-food giant didn't announce a capital return plan for the future, but executives affirmed their broader commitments to "returning all free cash flow to shareholders" after reinvesting in the business. Those payouts should still be significant in 2020, but growth will be limited by McDonald's remodeling initiatives and its aggressive push into home delivery. The chain also won't be benefiting anymore from its refranchising move that has lifted operating margin by over 10 percentage points since 2015. That metric held steady in 2019 at 43% of sales.

The good news is that McDonald's is enjoying some of its best global growth rates in a decade, with comps landing at 5.9% for the year compared with 4.5% in 2018. More progress along that score could easily offset any potential headwinds from margin pressure in 2020.

Demitrios Kalogeropoulos owns shares of McDonald's and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool has a disclosure policy.

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