McDonald's (MCD) Sales Building Efforts to Drive Growth

McDonald's Corporation’s MCD impressive earnings surprise history, various sales and digital initiatives as well as positive comparable sales bode well for the company. These apart, its strategic initiatives to drive growth in International Lead & High Growth Markets are encouraging.

Backed by these efforts, the stock has gained nearly 12% in the past six months. Yet, high labor costs and currency headwinds remain major concerns. Also, revenues have been under pressure for quite some time due to its refranchising initiatives.

Key Catalysts

McDonald’s delivered better-than-expected earnings for the 18th straight quarter when it posted fourth-quarter 2018 results. The bottom line also surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 5.2%. A robust operating performance drove McDonald’s earnings during this time frame. Adjusted earnings of $1.97 per share surpassed the consensus mark of $1.90 and increased 15% from the year-ago quarter number (18% in constant currencies).

Internationally, McDonald’s sales boosting initiatives are driving comparable sales (comps). In fourth-quarter 2018, global comps grew 4.4%, marking its 14th straight quarter of positive comps. Moreover, U.S comps were up 2.3% in the period. In order to drive comps in the United States, representing about 40% of the company’s business, McDonald’s aims at improving its focus on growing guest traffic. In this regard, it is imperative to mention that the company is accentuating on operational excellence, product innovation, offering a value menu and rolling out more limited-time offerings. The United Kingdom reported 51 straight quarter of like-for-like sales growth. Meanwhile, Australia, Canada, Germany and Italy are all witnessing robust sales growth.

Further, this Zacks Rank #3 (Hold) company’s strategic efforts in the International Lead segment and High Growth markets continue to drive comps higher. In fourth-quarter 2018, the International Lead segment and High Growth markets witnessed comps growth of 5.2% and 4.8% each, following a respective gain of 5.4% and 4.6% in the third quarter. Comps growth in international markets was driven by robust sales in the United Kingdom, Australia and France. In High Growth markets, improvement in comps can be attributed to solid performance in Italy, Poland, the Netherlands as well as impressive results across majority of the segments.

Concerns

Revenue decline at McDonald’s has been weighing on the company’s performance for quite some time. In the fourth quarter of 2018, the metric decreased 3% year over year, following a 7%, 12% and 9% fall in the third, second and first quarter of 2018, respectively. The top line had also declined 11.4%, 13%, 7%, and 4.7%, in the fourth, third, second and the first quarter of 2017, respectively. This downturn reflects the impact of the company’s strategic refranchising initiatives. During the reported quarter, the company-operated restaurants’ revenues decreased 11% year over year to $2,371.2 million.

Of late, McDonald’s margins have been under pressure due to worldwide wage increases. Meanwhile, apart from minimum wage increases, additional health care costs related to ‘Obamacare’ in the United States are pushing up labor costs. Further, costs associated with brand positioning in all the key markets as well as ongoing investments in initiatives would continue to dent margins at least in the near term. Increased commodity costs may further hurt margins. In the fourth quarter, company-operated margins contracted 190 bps, following a decline of 70 bps in the preceding quarter due to continued labor as well as commodity pressures across major markets.

Key Picks

Better-ranked stocks in the same space include Brinker International, Inc. EAT, El Pollo Loco Holdings, Inc. LOCO and Darden Restaurants, Inc. DRI, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Brinker International current-year earnings are likely to grow by 10%.

El Pollo Loco Holdings delivered positive earnings surprise in three of the trailing four quarters, the average beat being of 5.5%.

Darden Restaurants reported better-than-expected earnings in three of the trailing four quarters, the average beat being 4%.