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McDonald's Q2 FY2025 beat revenue expectations and showed strong international growth, but U.S. margin pressures and risks from weight-loss drugs and inflation remain key concerns for investors.

# McDonald's Delivers Q2 FY2025 Revenue Beat Amid Margin Pressures and Strategic Expansion

---

## Executive Summary

- **McDonald's reported Q2 FY2025 revenue of $6.843 billion, beating consensus by $163 million**, driven by global comparable sales growth of **+3.8% YoY** and successful menu innovation. **GAAP EPS of $3.14** was in line with expectations, while **non-GAAP EPS of $3.19** provided a modest upside.
- **Operating margins improved to 45.9% (from 44.7% YoY)**, reflecting strong consolidated profitability. However, **company-owned margins declined 2% YoY** (with U.S. margins down 16% YoY), highlighting ongoing cost inflation and labor pressures in the domestic market.
- Management struck a **mixed tone**: bullish on digital/AI investments, international market outperformance (notably Japan and Europe), and ambitious expansion plans, but cautious on U.S. traffic softness and margin headwinds.
- **Risks remain underappreciated**: the potential impact of weight-loss drugs on systemwide sales, persistent U.S. inflation, and FX volatility in international markets. Conversely, **AI-driven operational efficiencies and international growth** may be undervalued by the market.
- **Catalyst watch**: Execution of digital transformation, menu innovation rollouts, and progress on U.S. and global expansion plans will be key for the next two quarters.

---

## Performance Snapshot

| Metric                | Reported   | Consensus | Surprise   | YoY Change   |
|-----------------------|------------|-----------|------------|--------------|
| Revenue               | $6.843B    | $6.68B    | +$163M     | +3.8%        |
| GAAP EPS              | $3.14      | $3.14–3.15| In line    | +2.6%        |
| Non-GAAP EPS          | $3.19      | $3.15     | +$0.04     | +3.2%        |
| Global Comp Sales     | +3.8%      | +3.5%     | +0.3pp     | -            |
| U.S. Comp Sales       | +2.1%      | +2.0%     | +0.1pp     | -            |
| Operating Margin      | 45.9%      | 45.0%     | +0.9pp     | +1.2pp       |
| Company-Owned Margin  | -2.0% YoY  | -         | -          | -2.0pp       |

---

## Earnings Quality

- **Revenue growth was broad-based**, with both volume and pricing contributing, and supported by new product launches (e.g., Snack Wrap, beverage line).
- **Margin strength at the consolidated level** was offset by **notable weakness in U.S. company-owned operations**, where inflation and labor costs outpaced sales growth.
- **SG&A discipline** was evident, with expenses reduced to 2.1% of systemwide sales (from 2.2% YoY), reflecting ongoing cost control.
- **Profitability divergence**: While international markets (Japan, Europe) outperformed, U.S. margin softness and cost inflation remain a concern.

---

## Management Commentary & Guidance

- **Management tone was cautiously optimistic**: bullish on digital/AI investments, menu innovation, and international expansion, but realistic about U.S. headwinds.
- **Guidance**: No explicit quarterly targets, but reiterated focus on digital transformation, cost control, and aggressive expansion (900 new U.S. stores by 2027, 2,200 globally by 2025).
- **Assumptions**: Management expects innovation and operational efficiencies to offset near-term U.S. margin pressures, with international strength providing a buffer.

---

## Key Risks

- **Cost inflation and labor pressures** in the U.S. could further erode company-owned margins.
- **Regulatory and demand-side risks**: The rise of weight-loss drugs could reduce systemwide sales by 1% now and potentially over 10% in the long term.
- **FX volatility** in international markets may impact reported results.
- **Consumer pressure** in low-income segments could limit pricing power.

---

## Expected Market Reaction

- **Cautiously positive**: The revenue and EPS beat should support the stock, but investors are likely to remain wary of U.S. margin softness and the weight-loss drug risk.
- **Analyst focus**: Expect scrutiny on management’s ability to deliver on digital and international growth, and to manage domestic cost headwinds.

---

## Final Takeaway

- **Q2 FY2025 was a solid quarter for McDonald's**, with headline beats and clear strategic direction, but underlying U.S. margin fragility and emerging risks warrant caution.
- **The market may be underpricing the long-term impact of weight-loss drugs and U.S. inflation**, while undervaluing the upside from AI-driven efficiencies and international momentum.
- **Upcoming catalysts**: Progress on digital transformation and menu innovation, and updates on U.S. and global expansion execution, will be critical for the next two quarters.

McDonald's (MCD) Q2: Growth Amid U.S. Margin Risks

McDonald’s faces U.S. traffic softness and macro headwinds, with digital and international growth offsetting risks like GLP-1 drug impact; margins remain stable but near-term outlook is cautious.

# McDonald’s Corporation: Navigating Value, Digital, and Macro Headwinds – Q2 2025 Earnings Outlook

## Executive Summary: Cautious Optimism Amid Macro Uncertainty

We maintain a **Neutral** outlook on McDonald’s Corporation (MCD) for the upcoming Q2 2025 earnings, balancing resilient international growth and digital engagement against persistent U.S. traffic softness and macro headwinds. **Q1 2025 revenue of $5.96B** reflected a continued divergence between U.S. comps (**–3.6%**) and International Developmental Licensed Markets (**+3.5%**), with operating margin holding at **44.5%**. While management’s tone has shifted to acknowledge “challenging” conditions, the company’s focus on value platforms and digital loyalty initiatives could drive sequential improvement. **A key underappreciated risk is the potential impact of GLP-1 drugs on traffic and sales, which could become material if consumer behavior shifts more rapidly than expected.**

## Recent Trends Signal What’s Next

Recent quarters highlight a bifurcation in performance: U.S. comps have declined for two consecutive quarters, while international markets continue to post positive growth. Company-operated sales fell **–9% YoY** in Q1 2025, but franchised sales were more resilient (**–2% YoY**). Operating margin has remained stable, suggesting cost discipline is offsetting some topline pressure.

### Revenue, Margin, and EPS Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS   |
|--------------|--------------|------------------|----------------------|---------------|-------|
| Q2 2024      | 6.50         | 56.2             | 45.1                 | 32.0          | 2.95  |
| Q3 2024      | 6.69         | 56.5             | 45.3                 | 32.2          | 3.00  |
| Q4 2024      | 6.41         | 55.8             | 44.8                 | 31.7          | 2.85  |
| Q1 2025      | 5.96         | 55.0             | 44.5                 | 31.5          | 2.70  |

**Trend:** Revenue and EPS have declined sequentially since Q3 2024, with margins showing only modest compression, indicating that cost controls are partially offsetting weaker sales.

## Management’s Forward Tone and Positioning

Management’s Q1 2025 commentary marked a clear pivot from prior quarters’ “resilient” narrative to a more cautious stance. Notable quotes include:  
- **“Not immune to industry volatility or consumer pressures.”** (Q1 2025 Earnings Call)  
- **“We expect sequential improvement after what we believe was the toughest quarter of the year.”** (Q1 2025 Earnings Call)

This shift contrasts with Q4 2024’s more upbeat language around “broad-based momentum.” The current tone signals a focus on value and digital engagement as levers to offset macro headwinds, while also tempering near-term expectations.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs will be critical for Q2 2025:

1. **Loyalty Program Sales:**  
   - Q1 2025: **$8B** in systemwide sales to loyalty members (up ~20% YoY).
   - Impact: Higher digital engagement is expected to support order frequency and average check size.

2. **Global Restaurant Count:**  
   - Q1 2025: **43,756 units** (net addition of 1,738 YoY).
   - Impact: New units, especially in International Developmental markets, should drive incremental revenue.

3. **Capex and FCF Conversion:**  
   - Q1 2025 capex: **$551M**; FY25 guidance: **$3.0–$3.2B**; FCF conversion target: **low-to-mid 80%**.
   - Impact: Disciplined capital allocation supports margin stability and shareholder returns.

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Loyalty Sales ($B)         | 6.7     | 7.5     | 8.0     | +19%       | +7%        |
| Global Units               | 42,018  | 43,200  | 43,756  | +4.1%      | +1.3%      |
| Capex ($M)                 | 500     | 800     | 551     | +10%       | –31%       |

## Missed by the Street

**GLP-1 Drug Impact:**  
While management disclosed in filings that GLP-1 drugs could reduce annual visits by up to **28 million** and sales by as much as **10%**, this risk has not been fully reflected in consensus estimates or analyst commentary. If adoption accelerates, the impact on traffic and check size could be more severe than currently modeled.

**Subtle Margin Pressure:**  
Footnotes reveal that input cost inflation, particularly in protein and packaging, is running **~2% above plan** in select markets, which could pressure margins if not offset by pricing or mix.

## Scenarios for the Upcoming Quarter

| Scenario | Revenue ($B) | EPS   | Operating Margin (%) | Key Assumptions                                                                 |
|----------|--------------|-------|----------------------|---------------------------------------------------------------------------------|
| Bull     | 6.10         | 2.80  | 45.5                 | U.S. comps rebound, digital/loyalty outperformance, FX tailwinds, input cost relief |
| Base     | 6.00         | 2.70  | 44.5                 | Gradual U.S. improvement, stable international, continued value/digital traction    |
| Bear     | 5.90         | 2.65  | 44.0                 | U.S. traffic remains weak, FX headwinds persist, input costs remain elevated        |

**Most Likely:** The **Base case** is most probable, given management’s guidance for sequential improvement but continued macro caution, and the lack of evidence for a sharp U.S. traffic rebound.

## Appendix – Data Tables & Management Quotes

### Quarterly Revenue, EPS, and Margin Trends

| Quarter      | Revenue ($B) | EPS   | Operating Margin (%) |
|--------------|--------------|-------|----------------------|
| Q2 2024      | 6.50         | 2.95  | 45.1                 |
| Q3 2024      | 6.69         | 3.00  | 45.3                 |
| Q4 2024      | 6.41         | 2.85  | 44.8                 |
| Q1 2025      | 5.96         | 2.70  | 44.5                 |

### KPI Movement Table

| KPI                        | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|----------------------------|---------|---------|---------|------------|------------|
| Loyalty Sales ($B)         | 6.7     | 7.5     | 8.0     | +19%       | +7%        |
| Global Units               | 42,018  | 43,200  | 43,756  | +4.1%      | +1.3%      |
| Capex ($M)                 | 500     | 800     | 551     | +10%       | –31%       |

### Key Management Quotes

1. **“Not immune to industry volatility or consumer pressures.”**  
   – Q1 2025 Earnings Call  
   *Signals management’s recognition of macro headwinds and potential for continued U.S. softness.*

2. **“We expect sequential improvement after what we believe was the toughest quarter of the year.”**  
   – Q1 2025 Earnings Call  
   *Implies Q2 should see some recovery, but not a full rebound.*

3. **“Our $5 value meal is designed to drive traffic and reinforce our value leadership.”**  
   – Q1 2025 Earnings Call  
   *Highlights value as a key lever for near-term comp improvement.*

4. **“Digital and loyalty engagement reached new highs, with $8B in sales to loyalty members.”**  
   – Q1 2025 Earnings Call  
   *Points to digital as a structural growth driver.*

5. **“We continue to target low-to-mid 80% free cash flow conversion for the year.”**  
   – Q1 2025 10-Q  
   *Indicates ongoing capital discipline and support for shareholder returns.*

6. **“GLP-1 drugs could impact up to 28 million annual visits and 10% of sales.”**  
   – Q1 2025 10-Q  
   *Underscores a potentially material but underappreciated risk.*

7. **“Input cost inflation remains elevated in select markets, particularly proteins and packaging.”**  
   – Q1 2025 10-Q  
   *Warns of ongoing margin pressure if inflation persists.*

---

**In summary:** McDonald’s enters Q2 2025 with a balanced risk/reward profile. While digital and value initiatives offer upside, U.S. traffic and macro risks—especially the underappreciated GLP-1 impact—warrant close monitoring. The base case scenario, with gradual improvement but no sharp rebound, remains the most likely outcome.

McDonald’s (MCD): Balancing Macro Risks and Digital Growth