BUSN 5200 McDonald's and McWendy's Financial Statement Analysis

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Financial Analysis of the McDonalds Company

Stock ticker symbol, exchange where traded: MCD (NYSE)

PART 1, COMPANY OVERVIEW:

a. Brief description of the company

McDonalds is a leading restaurant chain operating in the United States and globally. The company’s products include various food items, soft drinks, coffee, and beverages. The company serves over 69 million customer every day, through 6598 company-owned and 27,882 franchisee-owned restaurants globally . The company clocked revenues of $27.56 billion in revenues globally in FY 2012, growing at 2.1% over FY 2011. The company has adopted a three-pronged strategy to grow its business – Optimize the menu, Modernize customer experience and Broaden accessibility to McDonald’s brands.

b. Company history (origin, major developments, etc.)

McDonalds was founded in the year 1948 as a self-service drive-in restaurant. Starting with a very brief menu in 1948, the famous French-fries made its debut in the McDonalds menu. The year 1954 saw the emergence of the franchisee model with Ray Kroc opening his first McDonalds restaurant. By 1959, McDonalds had opened a chain of 100 restaurants, growing to 500 in just 4 years and to 5000 by 1978. With a business in hyper-growth stage, McDonalds went public in 1965 with an Initial Public Offering and by 1967 McDonalds started its international operations. Today, the company operates in 119 countries.

c. Organization (describe how the company is structured)

McDonalds’ business administration is structured as geographical segments that include United States, Europe, Other countries (including Canada and Latin America) and Asia-Pacific, Middle East &Africa.

d. Main products and services (describe what the company sells; how it makes money)

The company’s major products include food items, coffee, beverages etc. The major revenue streams for the company include product sales (through company-owned restaurants) and fees from franchisee-owned restaurants. McDonalds adopts different revenue models for the franchisee revenues that include royalty (based on sales), facility rent as well as initial fees based on the geography and the type of franchisee (conventional franchisee, developmental licensees and foreign affiliates).

e. Geographic area of operations (describe where the company sells its products)

McDonalds operates in over 119 countries globally. United States is among the biggest operations for McDonalds, while it also actively focuses on other established markets such as France, Germany and Australia as well as on emerging markets such as India, China, Brazil and Russia. The US segment accounts for 32% of the total group revenues whereas Europe and APMEA contribute to 39% and 23% of revenues respectively. The US, Canada and six non-american markets UK, France, Germany, Australia, China and Japan contribute to nearly 70% of the total revenues. The company has added 1439 new restaurants globally as part of its strategy to Broaden accessibility to McDonald’s brands.

f. Recent developments (list recent major news stories, if any)

The company operates in a very competitive market in the United States with other major chains such as Taco and Starbucks constantly vying for market share. In a recent development, YUM Brands’ Taco Bell has launched a marketing campaign, depicting Ronald McDonald endorsing Taco Breakfast menu. This campaign, analysts feel will dent McDonalds’ breakfast menu revenues.

PART 2, FINANCIAL OVERVIEW:

a. Sales and Income Record:

Dollars in millions, except per share data	2008	2009	2010	2011	2012
Company-operated sales	$ 16,561	$ 15,459	$ 16,233	$ 18,293	$ 18,603
Franchised revenues	$ 6,961	$ 7,286	$ 7,842	$ 8,713	$ 8,964
Total revenues	$ 23,522	$ 22,745	$ 24,075	$ 27,006	$ 27,567
Revenue Growth Rate % (YoY)	-	-3.3%	5.8%	12.2%	2.1%
Operating income	$ 6,443	$ 6,841	$ 7,473	$ 8,530	$ 8,605
Operating Income Growth Rate % (YoY)		6.2%	9.2%	14.1%	0.9%
Net income	$ 4,313	$ 4,551	$ 4,946	$ 5,503	$ 5,465
Net Income Growth Rate % (YoY)	-	5.5%	8.7%	11.3%	-0.7%

McDonald’s revenues grew by 2.1% in FY 2012 compared to higher growth rates in previous years, in spite of adding over 1439 restaurants globally. This sluggish top line growth is attributable to a reduced same store sale growth of 3.1% globally. Though US and Europe reported same store sales growth of 3.3% and 2.4%, APMEA recorded 1.4% due to Japan’s uneven recovery and China’s slower economic growth.

McDonald’s Net Income stayed nearly flat with a nearly identical cost structure compared to FY 2011 and moderate commodity cost increases, occupancy costs and higher labor costs compared to pricing yield. Foreign currency translations also led to an impact of $178 million due to a weaker Euro.

b. Expense Distribution:

An analysis of the cost structures reveal Food & Paper, Payroll and Occupancy costs (all clubbed as Company owned outlet costs). The Food & Paper account for the major cost of sales being the product sold. The restaurant industry is characterized by labor intensity in spite of automation brought about by PoS machines and order processing infrastructure. With increasing labor costs globally, Payroll expenses are likely to grow in the future. Real Estate markets are recovering globally after the financial meltdown in 2009-10. With increasing cost of real estate, occupancy costs contribute to a major portion of the costs. Selling related costs are mainly driven by marketing related spend and cost of interiors. With McDonald’s strategy to broaden accessibility to McDonald’s brands, facility acquisition and related costs are expected to increase.

c. Assets Distribution:

Asset Distribution (FY 2012)
Cash and Equivalents	2336.10
Accounts Receivables	1375.30
Inventories	121.70
Fixed Assets	24677.20
Other Assets	6876.20
Dollars in millions, except per share data

An analysis of the asset structure reveals nearly 70% in fixed assets mainly through company-owned facilities and associated capitalized expenses. With an operating history of over 6 decades and a strong brand name, Goodwill represents a significant portion of other assets along with investments. With the company owned restaurants operating on a pure cash operating basis, the franchisee revenues receivables contribute to around 4% and a cash margin of 6% indicating a significant re-investment of cash generated into the business.

c. Capital Structure:

Capital Structure (FY 2012)
Current Liabilities	3403.10
Long-Term and Other Liabilities	16689.80
Preferred Stock	0.00
Common Equity	15293.60
Dollars in millions, except per share data

An analysis of the capital structures represents a moderately levered balance sheet with long-term liabilities contributing to 47% of the capital structure and book value of equity funding at 43%. The remaining 9% of capital funding is through current liabilities including vendor payables, payroll and tax liabilities.

PART 3, RATIO ANALYSIS:

(1) LIQUIDITY:

	Mc Donalds	Wendy's
Liquidity	*2011*	*2012*	*2011*	*2012*
Current Ratio	1.25	1.45	2.18	2.47
Quick Ratio	1.22	1.41	2.15	2.43

The above discussed liquidity ratios describe the ability of a company’s ability to meet its short-term obligations using its most liquid assets (current assets). Comparison of liquidity ratios indicate a positive solvency for both the companies, with Wendy’s ahead due to a higher cash margin.

(2) ASSET MANAGEMENT

	Mc Donalds	Wendy's
Asset Management	*2011*	*2012*	*2011*	*2012*
Asset Turnover	0.82	0.78	0.57	0.58
Average Collection Period	18.04	18.21	10.26	8.91

Asset Efficiency metrics reveal McDonald’s to be utilizing its assets better to generate sales compared to Wendy’s over the review period. However, collections indicate comparatively inefficient receivable management compared to Wendy’s, possibly due to a higher credit business revenues from franchisees (32%) compared to Wendy’s (12%).

(3) DEBT MANAGEMENT:

	Mc Donalds	Wendy's
Debt Management	*2011*	*2012*	*2011*	*2012*
Debt to Assets	0.38	0.39	0.32	0.34
Times Interest Earned	17.31	16.66	1.20	1.24

An analysis of the Debt-to-Assets ratio indicates a slightly more levered balance sheet in McDonald’s books compared to Wendy’s. This can be explained by a high re-investment rate through cash generated and reliance on debt for funding growth initiatives.

In spite of a higher debt structure, McDonald’s much profitable operations have ensured a higher interest coverage to repay interest costs on debt-financing. However, a higher cost structure of Wendy’s has meant thin operating margins and thus a very low interest coverage .

(4) PROFITABILITY:

	Mc Donalds	Wendy's
Profitability	*2011*	*2012*	*2011*	*2012*
Net Profit Margin	20.38%	19.82%	0.41%	0.28%
Return on Assets	16.68%	15.44%	0.23%	0.16%
Return on Equity	38.24%	35.73%	0.49%	0.36%

As discussed in the previous section, McDonald’s leaner cost structure have ensured significantly higher profitability compared to that of Wendy’s measured by the above three ratios. Wendy’s costs on the other hand have grown at a rate comparable to that of the revenues

Modified Du Pont Equation, FY 2012:

	Mc Donalds	Wendy's
Modified Dupont Equation	*2011*	*2012*	*2011*	*2012*
Net Profit Margin	20.38%	19.82%	0.41%	0.28%
Asset Turnover	0.82	0.78	0.57	0.58
Equity Multiplier	2.29	2.31	2.15	2.17

(5) MARKET VALUE RATIOS:

	Mc Donalds	Wendy's
Market Value	*2011*	*2012*	*2011*	*2012*
Price per Share (As on December 31)	$ 100.33	$ 88.21	$ 5.36	$ 4.70
Book Value per Share	$ 31.96	$ 35.03	$ 10.53	$ 10.97
Earnings Per Share	$ 5.33	$ 5.41	$ 0.02	$ 0.02
PE Ratio	18.82	16.30	221.02	260.18
Market to Book Ratio	3.14	2.52	0.51	0.43

Comparison of Price-Earnings multiples reveal Wendy’s trading at a significant premium compared to that of McDonalds. However, it is to be noted that Wendy’s trading at a discount to the book value indicating that market perceptions of Wendy’s being an undervalued security trading below its book value.

PART 4, CONCLUSIONS AND RECOMMENDATIONS

Detailed analysis of McDonald’s indicates a sluggish top line growth globally mainly the Asian markets. However, due to a controlled cost structure, McDonald has been able to sustain its profit levels in spite of an increase in input costs and manpower costs. However, with McDonald’s aggressive growth focus, one can expect top line improvement in the short to medium term.

Competitor analysis also reveals that McDonalds stays ahead of its key competition across asset efficiency and profitability.

BUSN 5200 McDonald's and McWendy's Financial Statement Analysis

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