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MarketScreener Homepage  >  Equities  >  Nyse  >  McDonald's Corporation    MCD


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McDonald : MCDONALDS CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/10/2020 | 01:53pm EDT


The Company franchises and operates McDonald's restaurants, which serve a
locally-relevant menu of quality food and beverages in 119 countries. Of the
39,020 restaurants at June 30, 2020, 36,371 were franchised, which is 93% of
McDonald's restaurants.
The Company's reporting segments are aligned with its strategic priorities and
reflect how management reviews and evaluates operating performance. Significant
reportable segments include the United States ("U.S.") and International
Operated Markets. In addition, throughout this report we present the
International Developmental Licensed Markets & Corporate segment, which includes
markets in over 80 countries, as well as Corporate activities.
McDonald's franchised restaurants are owned and operated under one of the
following structures - conventional franchise, developmental license or
affiliate. The optimal ownership structure for an individual restaurant, trading
area or market (country) is based on a variety of factors, including the
availability of individuals with entrepreneurial experience and financial
resources, as well as the local, legal and regulatory environment in critical
areas such as property ownership and franchising. The business relationship
between McDonald's and its independent franchisees is supported by adhering to
standards and policies and is of fundamental importance to overall performance
and to protecting the McDonald's brand.
The Company is primarily a franchisor and believes franchising is paramount to
delivering great-tasting food, locally relevant customer experiences and driving
profitability. Franchising enables an individual to be their own employer and
maintain control over all employment related matters, marketing and pricing
decisions, while also benefiting from the strength of McDonald's global brand,
operating system and financial resources.
Directly operating McDonald's restaurants contributes significantly to our
ability to act as a credible franchisor. One of the strengths of the franchising
model is that the expertise from operating Company-owned restaurants allows
McDonald's to improve the operations and success of all restaurants while
innovations from franchisees can be tested and, when viable, efficiently
implemented across relevant restaurants. Company-owned and operated restaurants
provide Company personnel with a venue for restaurant operations training
experience. In addition, in our Company-owned and operated restaurants, and in
collaboration with franchisees, we are able to further develop and refine
operating standards, marketing concepts and product and pricing strategies that
will ultimately benefit McDonald's restaurants.
The Company's revenues consist of sales by Company-operated restaurants and fees
from restaurants operated by franchisees. Fees vary by type of site, amount of
Company investment, if any, and local business conditions. These fees, along
with occupancy and operating rights, are stipulated in franchise/license
agreements that generally have 20-year terms. The Company's Other revenues are
comprised of technology fees paid by franchisees, revenues from brand licensing
arrangements, and third party revenues for the Dynamic Yield business.
Conventional Franchise
Under a conventional franchise arrangement, the Company generally owns or
secures a long-term lease on the land and building for the restaurant location
and the franchisee pays for equipment, signs, seating and décor. The Company
believes that ownership of real estate, combined with the co-investment by
franchisees, enables us to achieve restaurant performance levels that are among
the highest in the industry.
Franchisees are responsible for reinvesting capital in their businesses over
time. In addition, to accelerate implementation of certain initiatives, the
Company may co-invest with franchisees to fund improvements to their restaurants
or their operating systems. These investments, developed in collaboration with
franchisees, are designed to cater to consumer preferences, improve local
business performance, and increase the value of our brand through the
development of modernized, more attractive and higher revenue generating
The Company requires franchisees to meet rigorous standards and generally does
not work with passive investors. The business relationship with franchisees is
designed to facilitate consistency and high quality at all McDonald's
restaurants. Conventional franchisees contribute to the Company's revenue,
primarily through the payment of rent and royalties based upon a percent of
sales, with specified minimum rent payments, along with initial fees paid upon
the opening of a new restaurant or grant of a new franchise. The Company's
heavily franchised business model is designed to generate stable and predictable
revenue, which is largely a function of franchisee sales, and resulting cash
flow streams. As most revenues are based on a percent of sales, the Company
expects that temporary restaurant closures, limited operations and dramatic
changes in consumer behavior, as a result of COVID-19, will continue to have a
significant negative impact on revenues.
Developmental License or Affiliate
Under a developmental license or affiliate arrangement, licensees are
responsible for operating and managing the business, providing capital
(including the real estate interest) and developing and opening new restaurants.
The Company generally does not invest any capital under a developmental license
or affiliate arrangement, and it receives a royalty based on a percent of sales,
and generally receives initial fees upon the opening of a new restaurant or
grant of a new license.



Table of Contents

While developmental license and affiliate arrangements are largely the same, affiliate arrangements are used in a limited number of foreign markets (primarily China and Japan) where the Company also has an equity investment and records its share of net results in Equity in earnings of unconsolidated affiliates. As both royalty revenues and the Company's share of net results in equity investments are based on sales results, the Company expects to continue to have a significant negative impact to revenues and Equity in earnings of unconsolidated affiliates as a result of COVID-19.

COVID-19 Impact and Strategic Direction
Driven by our Velocity Growth Plan (the "Plan") the Company delivered strong
global comparable sales in 2019 and early 2020. The outbreak of COVID-19 and the
resulting operational impact brought on by several related factors, including
temporary restaurant closures, limited operations and dramatic changes in
consumer behavior, led to a marked decline in sales during the second half of
March and early in the second quarter. The Company focused on contactless
service and enhancing operating procedures to create a safe environment for both
customers and crew. Global monthly comparable sales sequentially improved
throughout the second quarter as markets reopened and government restrictions
eased. In addition, the Company is:
•   Capitalizing on our high drive-thru penetration during the COVID-19 pandemic.
    Our drive-thru presence around the world has proven to be a competitive
    advantage as markets with a higher percentage of drive-thru are showing
    quicker recovery.

• Focusing on running great restaurants by simplifying operations through a

limited menu rooted in our core, iconic menu items and by creating a better

customer experience with improved speed of service.

While the Company cannot predict the duration or scope of the COVID-19 pandemic, it has negatively impacted the business and our financial results, condition and outlook. The Company has demonstrated the strategic foresight that will position our business for future success. This includes the Company's investments in technology and new capabilities through the following initiatives:

• Delivery. We now offer delivery in over 27,000 restaurants around the world

    and our delivery sales are up significantly versus pre-COVID-19 levels. We
    have been leveraging learnings throughout the System and sharing innovative
    best practices across our markets, including the use of contactless delivery,
    to adapt to changing customer behaviors. We continue to see great
    opportunities with delivery, and are focusing our efforts on encouraging
    customer order frequency and retention in 2020 and beyond.

• Digital. The investments the Company has made over the past several years

    with our emerging digital customer experience platform; including mobile
    order and pay and the acquisitions of Dynamic Yield and Apprente, remain a
    priority for our business. Dynamic Yield has been implemented via outdoor
    digital menu boards across the U.S. and Australia, offering customers a more
    customized experience, while Apprente, the conversational interface
    technology is expected to provide more efficient and accurate ordering in the
    drive-thru in the future. Our digital investments enable us to give customers
    more choices and flexibility in how they order, pay, and receive their food
    during this unprecedented time and will remain important to our business
    moving forward.

The Company is confident that our customer focus and current prioritization of resources will be important levers as we drive our recovery and we will continue to use our strategic agility to adapt to the evolving environment. While the Plan has served us well and elements of the Plan will continue to be important, we will continue to evolve the strategy as needed to meet the needs of the customer.



Table of Contents

Second Quarter and Six Months 2020 Financial Performance
Global comparable sales increased 7.2% for the two months ended February 2020,
with all segments benefiting from Leap Day. Globally, sales results began to
markedly decline during the second half of March due to COVID-19. Throughout the
second quarter of 2020, the U.S., International Operated Markets segment and
global monthly comparable sales results sequentially improved as markets
reopened restaurants and governments eased restrictions. Global comparable sales
decreased 23.9% for the quarter and 14.0% for the six months.
•        U.S. comparable sales decreased 8.7% for the quarter and 4.5% for the
         six months. Comparable sales results for the second quarter of 2020
         continued to benefit from strong average check growth. Comparable guest
         counts remained negative, particularly at the breakfast daypart.

•        International Operated Markets segment comparable sales decreased 41.4%
         for the quarter and 24.8% for the six months. Both periods were heavily
         impacted by temporary restaurant closures and limited operations,
         particularly in the U.K. and France.

•        International Developmental Licensed Markets segment comparable sales
         decreased 24.2% for the quarter and 14.4% for the six months. The second
         quarter results were primarily impacted by temporary restaurant closures
         across nearly all geographies, most notably in Latin America. Results
         for the quarter and six months reflected continued negative comparable
         sales in China. Results for both periods also reflected positive
         comparable sales in Japan.

In addition to the comparable sales results, the Company had the following financial results for the quarter and six months 2020:

© Edgar Online, source Glimpses

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