McDonald's Beats On Earnings As Refranchising Gains Mask A U.S. Business That Has Stopped Growing

McDonald's delivered a clean earnings beat in the third quarter, but its traffic problem is still unresolved. Adjusted EPS of $3.57 topped the $3.36 consensus by 4.7% and cleared the $3.41 Earnings Whisper number, with earnings up 10.9% year over year. That marks a clear acceleration in profit growth: constant-currency adjusted EPS rose 11%, compared with 5% in the second quarter and 1% in the first. Revenue moved the other way. It reached $7.157 billion, up just 1.1%, and missed the $7.28 billion consensus by 1.7%. The central tension is that bottom-line momentum is improving while the U.S. top-line engine has stalled.

The quality of the beat deserves scrutiny. Operating income rose $239 million to $3.595 billion. Of that increase, $102 million came from a jump in other operating income, to $139 million from $37 million a year ago, which the call tied largely to refranchising gains. The company has refranchised about 175 restaurants so far this year as it moves toward 98% franchised by 2028. That shift explains both sides of the headline:

• Company-operated sales fell 3%, which dragged on reported revenue.
• Franchised revenues grew 3%.
• Gains on sale and a leaner cost base lifted margins. Year-to-date adjusted operating margin reached 48.3%, up from 46.9% at the midpoint of the year.
• SG&A fell to 2.0% of systemwide sales from 2.2% in the second quarter.
• A roughly 1% lower diluted share count added further help.

These are real levers. They are not the same as organic demand, however, and the 4% dividend increase to $1.93 reflects the cash durability of the model more than a sales reacceleration.

The operating detail is where the story gets more complicated. U.S. comparable sales slipped 0.2%. That was the first negative print in the recent series, extending a steady slide from +6.8% in the fourth quarter of 2025 to +3.9%, then +0.8%. Guest counts fell, and positive check growth only partly offset them. Management pointed to improvement as the quarter progressed. U.S. comps turned positive in September after soft July and August results. Restored national digital offers, including a $2 breakfast sandwich and free fries, beat expectations on incremental traffic, and baseline traffic was described as encouraging into October. Internationally, results were split:

• International Operated Markets slowed to 1.4% from 1.5%, missing the sequential acceleration promised on the prior call. Management cited France, protests and the escalation of the war in Ukraine.
• International Developmental Licensed Markets accelerated to 4.2% from 1.9%, led by Japan's 44th straight quarter of growth. China remained negative as delivery-aggregator subsidies pulled back.

Global comps edged up to 1.5% from 1.3%.

The forward-looking signals lean cautious:

• Management declined to commit to better U.S. comps in the fourth quarter and expects conditions similar to the third.
• Gross openings were trimmed to 2,500 from 2,600, though net openings of about 2,100 were maintained.
• Capex is landing at the low end, around $3.7 billion.
• The currency tailwind has evaporated, from an estimated 20-30 cents at the first quarter to about 15 cents at the second quarter to nothing for the fourth quarter.
• Mid-single-digit food and paper inflation is expected in 2027.
• Management acknowledged that marketing effectiveness has been below standard.

Bears have legitimate ammunition here. The catalyst list is credible, though weighted toward 2027 and beyond. An entry-level value bundle test now covers more than 40% of the U.S. system, counting franchisee early adopters, ahead of a national launch targeted for early 2027. Specialty beverages are in about 18,000 restaurants, and checks that include one run roughly 50% above average. The Australia launch exceeded plan, and Europe follows by mid-2027. U.S. remodels are slated for the hundreds in 2027, with a global run rate above 5,000 a year from 2028. Management's tone was noticeably more constructive than the prior quarter's admission of poor execution.

The market setup reflects that ambivalence. Investor sentiment remained negative heading into the report but improved slightly, moving to -0.28 from -0.31, a modest shift rather than a change in conviction. Shares closed at $263.04 ahead of the release, down 2.7% from the opening price after the August report and 7% below the 200-day moving average of $282.87. The stock hit a 52-week low of $229.20 on October 5 and has since rallied 14.8% off that level. That leaves it about 5.5% below its inter-earnings high, meaning a sizable recovery was already underway into the print. Trend readings are mixed: momentum is still negative, while AVWAP has turned positive alongside the rebound.

The bottom line is that McDonald's showed it can keep compounding earnings through franchising mix, cost discipline and buybacks even with flat demand. The quarter did not show that U.S. traffic has turned. A September exit rate and early-October commentary are encouraging, but management itself is not promising fourth-quarter improvement. Meanwhile, IOM missed its guided acceleration, development was trimmed, and 2027 brings cost inflation. Until the value relaunch produces sustained positive U.S. comps, the earnings beats will carry less weight than the traffic line beneath them.

Read our earnings preview for McDonald's Corporation: https://www.earningswhispers.com/article/MCD/21715

This earnings review was originally published on Earnings Whispers.

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