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McDonald's (MCD) Up 25% in the Past Year: More Room to Run?

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McDonald's Corporation MCD is poised to benefit from robust comps growth, digital efforts and menu innovation. Also, focus on the loyalty program and drive-thru channels have been driving sales in the last few quarters. In the past year, shares of McDonald's have gained 24.6% compared with the industry’s 13.5% growth. However, a decline in traffic from pre-pandemic levels and a high debt levels are a concern. Let’s delve deeper.

Major Growth Drivers

Solid Comps Growth: McDonald's continues to impress investors with robust comparable sales growth. In third-quarter 2021, global comps advanced 12.7% against a decline of 2.2% in the prior-year quarter. This marks the third consecutive quarter of comps growth after reporting a decline in the preceding four quarters. In the third quarter, comps at the United States, international operated markets and the international developmental licensed segment rose 9.6%, 13.9% and 16.7%, respectively. Japan and Latin America posted robust comps growth. Notably, increased focus on drive-thru and digital channels coupled with strong marketing and limited-time promotions added to the upside.

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Zacks Investment Research

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Digitization Efforts: McDonald's continues to gain from robust digitalization. During the coronavirus pandemic, the company has been focusing on drive-thru, delivery & takeaway. Prior to the coronavirus crisis, drive-thru accounted for about two-thirds of all sales in the United States. Despite the reopening of dining rooms, the company stated that drive-thru sales in its top six markets continue to remain strong compared with pre-pandemic levels. The company informed that more than 80% of its restaurants across 100 markets globally provide delivery. In the United States, 95% of its restaurants offer drive-thru facilities. In the past year, delivery sales mix has doubled in Australia, Canada and the United States. The company announced that across its major six markets, digital sales crossed $10 billion or nearly 20% of system-wide sales in 2020.

Focus on Loyalty Program: McDonald's continues to focus on the loyalty program to drive sales and average checks. It believes that the program will not only help in retaining the existing customers but also expand the customer base. During third-quarter 2021 conference call, the company announced that the launch of its loyalty program in the United States surpassed expectations. In just a few months, the company has more than 1 million members enrolled, with more than 15 million active loyalty members earning rewards. Given the increased customer satisfaction and higher frequency among digital customers, the company anticipates the number to increase in the days ahead. McDonald's currently has loyalty programs in France, the United States and Germany. By mid-2022, the company expects to have a loyalty program in the top six markets. It expects to launch MyMcDonald's Rewards in the U.K. and Australia in the first half of 2022.

Menu Innovation: Additionally, the company continues to focus on product introduction to drive growth. During third-quarter 2021, menu innovations like Crispy Chicken Sandwich (in the United States) and McSpicy sandwich (the U.K.) became popular among customers, thereby boosting the top line. Going forward, McDonald's is focused on expanding its chicken offerings by leveraging food-line extensions of customer favorites. During the quarter, the company unveiled McPlant in Austria and the Netherlands as a limited time offer. It also initiated testing of McPlant in select restaurants in the the United States, the U.K. and Ireland. With primary results in the positive trajectory, the company intends to roll out the plant-based option across the U.K. by first-quarter 2022. Also, it stated that the item will be made available in other markets based on customer demand.

Concerns

McDonald’s results in the coming quarters are likely to reflect the impacts of the coronavirus pandemic. Although the company has reopened roughly 80% of its dining rooms in the United States (as of third quarter 2021), nearly 3,000 dining rooms remain closed in high-risk COVID areas. Also, traffic is below pre-pandemic levels. The company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.

Maintaining liquidity has become a herculean task amid the coronavirus pandemic. As of Sep 30, its long-term debt stood at $34.6 billion compared with $34.9 billion as of Jun 30, 2021. The company ended the third quarter with cash and cash equivalent of $4,306 million compared with $3,0490 million at the end of second-quarter 2021. Although cash and cash equivalent has increased it may not be enough to manage the high-debt level. The company’s debt-to-capitalization at the end of third-quarter 2021 was 119.3%, almost flat sequentially.

Zacks Rank & Key Picks

McDonald’s currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks in the Zacks Retail-Wholesale sector include Genesco Inc. GCO, Papa John's International, Inc. PZZA and Arcos Dorados Holdings Inc. ARCO.

Genesco sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 2,739.6%, on average. Shares of the company have increased 113.8% in the past year.

The Zacks Consensus Estimate for Genesco’s 2022 sales and earnings per share (EPS) suggests growth of 34.9% and 669.5%, respectively, from the year-ago period’s levels.

Papa John's currently carries a Zacks Rank #2. The company benefits from its off-premise business model. Sales at off-premise business models have exceeded pre-pandemic levels. We believe that a boost in customer count coupled with targeted off-premise marketing is likely to drive the channel’s performance in the upcoming periods.

Papa John's reported better-than-expected earnings in three of the trailing four quarters, the average surprise being 27.2%. The company’s fiscal 2022 earnings is likely to witness growth of 8.3%. PZZA stock has gained 58.7% in the past year.

Arcos Dorados carries a Zacks Rank #2. ARCO has a long-term earnings growth of 42.9%. Shares of the company have increased 16.9% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 10.4% and 255.6%, respectively, from the year-ago period’s levels.


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McDonald's Corporation (MCD) : Free Stock Analysis Report

Papa John's International, Inc. (PZZA) : Free Stock Analysis Report

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Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report

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