McDonald's (MCD) Bets on Robust Delivery Amid Soft Store Traffic
Shares of McDonald's Corporation MCD have gained 20.3% in the past six months, compared with the industry’s rally of 23.6%. The company’s focus on drive-thru, delivery and take-away amid the pandemic is driving growth. The company’s expansion strategy also bodes well. However, dismal comps and traffic is hurting the company. Let’s delve deeper.
Catalysts Driving Growth
Amid the coronavirus pandemic, the company has been focusing on drive-thru, delivery & take-away. Prior to the coronavirus outbreak, drive-thru accounted for about two-thirds of all sales in the United States. Drive-thru now comprises approximately 90% of sales. Moreover, McDonald’s continues to roll out mobile order and pay with a new curbside check-in option. To provide enhanced experience and convenience to customers, McDonald’s is increasingly focusing on delivery. The company provides delivery from more than 28,000 restaurants in above 75 countries. In third-quarter 2019, it partnered with Grubhub for the roll out of McDelivery to nearly 500 restaurants in the NYC and Tri-State area. It also partnered with DoorDash.
During third-quarter 2020, strong drive-thru and delivery sales got reflected in Australia sales despite restricted operating conditions, on account of rise in COVID-19 cases. Notably, majority of the orders came from digital channels such as mobile app and self-order kiosks. Also, solid comps were witnessed in Japan. As of Sep 30, 2020, most of the company’s restaurants were open globally.
During the third quarter, it introduced a spicy flavour in regards to the Chicken McNuggets. In October, the company unveiled the McCafé Bakery line, offering apple fritter, blueberry muffin, cinnamon roll and McCafé Coffee. Going forward, the company intends to focus on its chicken offerings by leveraging food-line extensions of customer favorites. In line with this, it plans to introduce Crispy Chicken Sandwich in the United States in early 2021. McDonald’s also intends to work on operational and formulation changes to improve the taste of its burgers.
The company believes that there is a huge opportunity to grow all its brands globally by expanding presence in existing markets and entering new markets. McDonald’s expansion efforts continue to drive performance. Currently, it has roughly 39,096 restaurants worldwide. Despite the pandemic, the company opened about 300 restaurants in China through September. It is also confident about opening 400 restaurants in China this year.
Concerns
McDonald’s results in the coming quarters are likely to be impacted by the coronavirus outbreak. Although the company has reopened most of its restaurants, it is likely to witness dismal traffic due the social distancing protocols.
Owing to a rise in COVID-19 cases (since September), government restrictions on operating hours, limited dine-in capacity and mandated dining room closures (in some cases) have been prominent. Notably, key markets including France, Germany, Canada and the U.K. have been negatively impacted by the same.
The company’s comps declined for the third straight quarter after reporting positive comps in the preceding 19 quarters. In the third quarter, global comps declined 2.2% against a gain of 5.9% in the prior-year quarter. In second-quarter 2020, comps were down 23.9%.
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 same space include Brinker International, Inc. EAT, Red Robin Gourmet Burgers, Inc. RRGB and Fiesta Restaurant Group, Inc. FRGI. Brinker sports a Zacks Rank #1, while Red Robin and Fiesta Restaurant carry a Zacks Rank #2 (Buy).
Brinker has a trailing four-quarter earnings surprise of 116.6%, on average.
Red Robin has a three-five year earnings per share growth rate of 10%.
Fiesta Restaurant’s 2021 earnings are expected to soar 418.8%.
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