McDonald's reported its Q2 earnings for June, revealing a mixed performance against market expectations. The company posted earnings of $2.97 per share, which fell short of the consensus of $3.07. Additionally, revenues were slightly below expectations, coming in at $6.49 billion versus the anticipated $6.62 billion. The most significant disappointment was the decline in global comparable sales, which decreased by 1.0%, marking the first decline in 13 quarters and contrary to the expected rise of 0.53%. This downturn was reflected across all segments, with U.S. comparable sales down by 0.7%, International Operated Markets down by 1.1%, and International Developmental Licensed Markets down by 1.3%.
Despite the top and bottom line miss, the stock is holding steady around the $253 area in early trade. The move suggests the negative expectations had been priced into shares. The stock is trying to put in a bottoming formation which now includes a straddle of the 200-sma ($256). This sets up as a key level for traders to watch.
The U.S. market showed a decline of 0.7% in comparable sales, a stark contrast to the 10.3% increase seen a year ago. This decrease was mainly attributed to a drop in comparable guest counts, although this was partially offset by growth in the average check due to strategic menu price increases. McDonald's continues to see positive contributions from restaurant-level execution and growth in digital and delivery services. However, the overall negative guest count indicates potential issues in attracting foot traffic, despite higher transaction values.
Internationally, the performance was similarly lackluster. The International Operated Markets segment saw a 1.1% decline in comparable sales, driven significantly by poor performance in France. The International Developmental Licensed Markets segment also reported a 1.3% decrease, influenced heavily by the ongoing conflict in the Middle East and negative sales trends in China. Positive sales in Latin America and Japan were not enough to offset these negative impacts.
Revenue for the quarter was relatively flat, showing a minor decrease of 0.1% year-over-year, with systemwide sales down by 1% but up 1% in constant currencies. Operating income also took a hit, decreasing by 5.9% year-over-year, influenced by $97 million in pre-tax non-cash impairment charges and $57 million in pre-tax restructuring charges related to the company's Accelerating the Organization initiative. When excluding these charges and prior year charges, operating income showed a decrease of 2%, or remained flat in constant currencies.
Diluted earnings per share came in at $2.80, down 11% from the previous year. When excluding the current year charges of $0.17 per share, adjusted diluted earnings per share were $2.97, reflecting a 6% decrease year-over-year, or 5% in constant currencies. This adjusted figure highlights a continuing trend of decreased profitability even after accounting for extraordinary items.
Looking ahead, McDonald's forecasts its annual operating margin to be in the mid-to-high 40% range and anticipates capital expenditures between $2.5 billion and $2.7 billion. This outlook suggests a cautious but steady investment approach amidst uncertain market conditions. The forecasted CAPEX indicates ongoing investment in growth initiatives, despite the current challenges.
Overall, McDonald's Q2 results highlight several areas of concern, particularly in terms of declining comparable sales across all major segments and a drop in operating income. However, the company's strategic focus on digital and delivery growth, coupled with prudent financial management, provides a foundation for navigating the current market challenges. Investors will be closely watching how McDonald's adapts its strategies to counteract the declining sales and maintain profitability in the upcoming quarters.