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Can McDonald's Counter Its Falling Domestic Sales?

- By Harsh Jain

McDonald's Corp. (MCD) ended 2016 in the green, up approximately 3%. Moreover, the stock is off to a decent start this year. Recently, the company reported fourth quarter results.

In the fourth quarter, the company posted earnings per share of $1.44, 3 cents over the estimates. On the other hand, the company's revenue came in at $6.03 billion, exceeding the consensus by $40 million. However, that figure still represents a drop of nearly 5% compared to a drop of 3.5% in the fourth quarter of 2015.


As a matter of fact, McDonalds' CEO Steve Easterbrook introduced a turnaround plan in 2015 and it looks like several parts of the plan have functioned. The company has managed to report positive global comparable same-store sales in the fourth quarter, making it the successive sixth quarter of positive comparable sales.

The company's global comps surged 2.7% on the back of progressive results in its worldwide lead, foundational segments and sturdy growth. Furthermore, the prior year was the company's most robust year of global comps since 2011.

However, taking a look at domestic comparable same-store sales reveals a different story. The company comps in the U.S. plunged 1.3%, disrupting the striking streak of positive comps over the past five quarters.

On the dark side, since the company terminated its Dollar Menu, its restaurant traffic has dropped approximately 10% in the U.S. To offset the declining restaurant traffic, the company is aggressively focusing on generating more money from each consumer.

The only way for McDonald's to win back consumers is to introduce innovative food products at an efficient price. Recently, the company introduced the Grand Mac and the Mac Jr., innovative variations of the Big Mac, for a limited period. As a consequence, proposing varieties of the popular burger looks like a promising move.

Apart from this, the company has also taken various steps such as using fresh meat and eggs from cage-free chickens to address the growing health concerns among the customers.

Moving ahead, the company appears to be in a great position to gain huge benefits from its enduring plan to refranchise over 4,000 locations by 2018, which should help it to further enhance its profitability by substantially cutting general and administrative (G&A) costs.

When it comes to dividend, the company has a remarkable dividend growth history. In the most recent quarter, it raised its dividend by 6%, which results in a healthy dividend yield of 2.97%. The most significant thing to notice is that the company has surged its dividend for the 41 successive years, which looks impressive.

Summing up

The company has managed to performed well in 2016, but the decline in the U.S. comps throws light on the fact that the accelerated sales from the launch of All-Day Breakfast have reached their peak point.

The company also recently introduced the two new variations of its popular Big Mac, which should hopefully help it to boost it sales again. Moreover, the company's marvellous dividend growth history makes it a Dividend Aristocrat. As a result, stockholders should continue to hold the stock for long-term gains.

Disclosure: No position in the stocks mentioned in this article.

This article first appeared on GuruFocus.


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