Loving It With McDonald’s Corporation (NYSE:MCD)?
McDonald’s Corporation (NYSE:MCD) is thirsty for meaningful turnaround. The focus is on reversing the long string of sales declines that has also put pressure on earnings. The new management, led by CEO Stevens Easterbrook, has already kicked into motion a number of processes aimed at returning the company to consistent sales growth going forward. Among the moves that have recently been made to trigger strong and sustainable growth at McDonald’s is the introduction of all-day breakfast in U.S. restaurants and menu modification in other regions.
Additionally, McDonald’s has also adopted a newer structure that allows regions to be more autonomous with regards to functions, such as menu innovation. As part of the strategy to allow regions to maintain some level of autonomy in decision-making, McDonald’s has reformed its reporting structure.
In the third quarter, the company reported under its new structure that reflects performance in four regions, namely the U.S., International Lead Markets, High-Growth Markets and Foundation Markets. Among other things, the new structure clubs together markets with overlapping characteristics for simplified administration and more visibility.
As the management moves to tackle the issues that need attention, progress can be seen, at least going by the last quarterly results. McDonald’s beat estimates by comfortable margins at both the top and bottom-line levels.
Strong 3Q results
McDonald’s Corporation (NYSE:MCD)’s 3Q results surpassed consensus expectations. EPS of $1.40 comfortably beat the consensus estimate of $1.27. Revenues of $6.6 billion rose 7% on constant currency terms and came up above the consensus estimate of $6.41 billion.
The chart below shows McDonald’s quarterly revenue recovery.
For the first time in two years, McDonald’s posted quarterly same-store-sales in the U.S. as all four other market regions impressed. Same-store-sales in the U.S. rose 0.9% in the quarter while sales in same-store-sales in International Lead Markets (the U.K., Australia, Germany and Canada) increased 4.6%.
The High-Growth Markets (where China is included) recorded 8.9% spike in same-store-sales in the quarter. McDonald’s saw sales in the Foundation markets up 6.1% in 3Q.
The surprise jump in sales in 3Q was fueled by all-day breakfast and the introduction of a new deluxe crispy chicken sandwich.The management anticipates continued sales growth in 4Q across all regions, driven in part by all-day breakfast in the U.S. and the ongoing structural adjustments in operations and menu.
Although easy comps supported significant jump in sales in 3Q, recent management executions, such as menu edits, also boosted sales growth in the quarter. Food contamination issues in China adversely impacted international sales last year, which explains the easy comps.
Menu updates, such as the Egg McMuffin and deluxe Buttermilk Crispy Chicken sandwich helped to boost 3Q sales.
If what has already happened under the leadership of CEO Easterbrook is any indicator of what is to come, you can expect more improvements in the performance of McDonald’s in the coming quarters. For example, the full quarterly impact from all-day breakfast is expected to be registered in 4Q. Going by early indications, all-day breakfast is promising to trigger more sales growth or at least plug sales declines in some markets.
As much as there may be some near-term pressures because of some legacy issues, Easterbrook has demonstrated that he is equal to the task of stabilizing sales at McDonald’s. Ending two years of sales decline however, is no mean feat.
You can already see that efforts by the Easterbrook-led management team are paying off as much as there remains more ground to be covered. Further clarity on the future of McDonald’s Corporation (NYSE:MCD) is expected to come out at the company’s Investor Meeting on November 10. The company is expected to issue 4Q guidance at the meeting.
Possibly, the management will offer more details about the turnaround initiatives and also update on issues such as dividends, capex/operating spending and buybacks. It is anticipated that dividends could be sweetened.
McDonald’s announced plans to return between $8 and $9 billion to shareholders through a combination of dividends and buybacks. In 3Q, the company returned $791.1 million to shareholders by way of dividends – about $0.85 per share. In the same period, the company returned $2.3 billion to shareholders through repurchases, indicating about $95 per share.
McDonald’s Corporation (NYSE:MCD) remains committed to shareholder return as much as it is managing a turnaround that consumes much money.
The divisive All-Day Breakfast
McDonald’s Corporation (NYSE:MCD)’s all-day breakfast is turning out to be a sharp, divisive issue. To some franchisees, the all-day breakfast offering is a blessing, but to others, it is a nightmare.
Nomura recently did an assessment of franchisees reception of all-day breakfast. The study focused on 29 US franchisees and covered 226 stores, although McDonald’s has over 14,000 stores.
Most of the franchisees that Nomura interviewed were negative about the all-day breakfast menu, terming it an unnecessary distraction. It turns out that some franchisees think that All-day breakfast doesn’t simplify the menu as they expected from the new CEO Easterbrook.
The problems that operators have cited about all-day breakfast include slowing down of service, chaos in the kitchens and reduced average ticket cost. Some operators say that the all-day breakfast rollout requires extra labor, which is difficult to afford at a time when they are already battling sales decline.
The food chain industry is a highly competitive space. As a market leader, McDonald’s is the target of many competitors, both existing and new. With pressure, McDonald’s is forced to experiment so much to try to differentiate its offerings, but such efforts can sometimes fail to deliver the expected returns after consuming resources.
Consumer spending at food stores depends on a number of economic factors, such as employment rates. As such, high unemployment rates can slow down sales at McDonald’s Corporation (NYSE:MCD) stores, even if it has the best menu offering among the competition.
Being that McDonald’s is exposed to China, the company is likely to feel pressure as China’s economic pressure hits consumer spending.
McDonald’s relies on outside suppliers for key inputs. If suppliers increase their prices, MCD can end up facing margins pressures, especially if the management isn’t ready to pass the extra costs to customers to avoid alienating them.
Currency translation impacts
McDonald’s Corporation (NYSE:MCD) generates the majority of its consolidated revenue outside the U.S. – its domicile market. As such, adverse fluctuations of global currencies put pressures on the company’s sales and profitability numbers.
Shifts in consumer dietary preferences can have profound impact McDonald’s Corporation (NYSE:MCD)’s sales. It is good news if the shift encourages more consumption but bad news if it keeps customers away from food chain stores.
The new management of McDonald’s Corporation (NYSE:MCD) is taking the right steps to tackle the issues that have held back the company. While turn-around of McDonald’s may not happen overnight, it is worth paying into.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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