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McDonald's Banks on Delivery to Drive Growth Amid Coronavirus

Zacks Equity Research

McDonald's Corporation MCD is benefiting from increased focus on delivery and accelerated deployment of EOTF restaurants in the United States. Additionally, the company is making every effort to drive growth in international markets. However, the coronavirus pandemic continues to hurt the company. Let’s delve deeper.

Factors Likely to Drive Growth

The company has been focusing on drive-thru, delivery & take-away amid the coronavirus pandemic. Prior to the outbreak, drive-thru accounted for about two-thirds of all sales in the United States. Drive-thru now accounts for approximately 90% of sales. Moreover, McDonald’s continues to roll out mobile order and pay, with a new curbside check-in option. It has already launched the option in nearly all 20,000 U.S. restaurants. The company provides delivery from more than 25,000 restaurants in above 75 countries. In third-quarter 2019, it partnered with Grubhub for the rollout of McDelivery to nearly 500 restaurants in the NYC and Tri-State area. It also collaborated with DoorDash.

Growing guest counts remains the company’s top priority and it intends to regain customers by focusing on food quality, convenience and value. Moreover, McDonald’s expects its velocity accelerators of Experience of the Future (EOTF), digital and delivery to drive growth in the long term. Given various initiatives undertaken to drive growth, the stock has a decent upside potential.

In 2018, McDonald’s had completed the conversion of 4,500 restaurants to Experience of the Future restaurants. Moreover, the company had completed the conversion of 2,000 restaurants to EOTF during 2019. The company announced that it has converted approximately 10,000 restaurants to EOTF or about 70% of the estate.

McDonald’s strategic efforts in the international markets continue to drive comps higher. The company’s is consistently trying to improve performance in Australia, Canada, France, Germany and the U.K. The company intends to drive comps growth in these markets through introduction of value meals, customizing the menu to local customer tastes, reimaging of restaurants, efficient marketing and promotions, improved service and increased convenience via delivery.

Concerns

McDonald’s results in the coming quarters are likely to be impacted by the coronavirus outbreak. Restaurant closure or limited operations may hurt the company’s results. All restaurants in the United States are operating through drive-thru, delivery & take-away only. However, restaurant closure in the international market and limited operations owing to the pandemic is likely to hurt performance. Although 99% restaurants are open in China, demand remains low. In Brazil, 65% of its restaurants are open but majority have limited operations.

Moreover, increase in operational costs due to the pandemic is likely to hurt margin in the coming quarter. Shares of the company have fallen 5.8% in the past six months, compared with the industry’s decline of 8.1%.

McDonald’s currently carries a Zacks Rank #3 (Hold).

Key Picks

Some better-ranked stocks worth considering in the same space include Domino's Pizza, Inc. DPZ, Wingstop Inc. WING and Yum China Holdings, Inc. YUMC. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Domino's Pizza, Wingstop and Yum China have an impressive long-term earnings growth rate of 12.5%, 11% and 9.5%, respectively.

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