McDonald's (MCD) Gains From Expansion Efforts, Cost Woes Stay

·4 min read

McDonald's Corporation MCD is benefiting from expansion effort, menu innovation, comps growth and robust digitalization. However, inflationary pressures, dismal China comps and high debt remain concerns.

Let’s delve deeper.

Growth Drivers

McDonald’s believes that there is a huge opportunity to grow all its brands globally by expanding its presence in existing markets and entering new ones. Its expansion efforts continue to drive performance. Despite unfavorable scenario, the company continues to expand its global footprint.

It is planning to open more than 1,900 restaurants globally in 2023, including 400 openings in the United States and IOM segment and 1,500(including nearly 900 in China) inaugurations in the IDL market. The company expects net restaurant unit expansion to contribute nearly 1.5% to 2023 systemwide sales growth in constant currencies.

The company continues to impress investors with robust comps growth. In fourth-quarter 2022, global comps advanced 12.6%, while a gain of 12.3% was reported in the prior-year quarter. This marks the eighth consecutive quarter of comps growth.

In the fourth quarter, comps in the United States, international operated markets and international developmental licensed segment rose 10.3%, 12.6% and 16.5%, respectively. The company gained from robust performance in Japan and Brazil.

The company, which share space with Yum China Holdings, Inc. YUMC, Jack in the Box Inc. JACK and BJ's Restaurants, Inc. BJRI is also focusing on menu innovation to drive growth. The company stated that it continues to witness positive momentum from the successful launch of Crispy Chicken Sandwich, as it launched McCrispy Chicken Sandwich in the UK in fourth- quarter 2022. The company also maintained leadership in France with its chicken McNuggets paired with trendy and unique sauces.

The company has been testing automated order-taking in the drive-thru at several restaurants in the United States. McDonald’s continues to roll out mobile orders and pay, with a new curbside check-in option. The company has been focusing increasingly on delivery to provide enhanced experience and convenience to customers.

MCD provides delivery in more than 100 countries. It has also reached new long-term strategic partnerships with Uber Eats and DoorDash for delivery. Over the past year, the delivery sales mix has doubled in Australia, Canada and the United States. McDonald’s has 25,000-plus drive-thru locations worldwide.

Concerns

The persisting inflationary pressures are likely to hurt the company’s margins. Margins in fourth-quarter 2022 suffered due to significant levels of food and energy inflation in the Europe. The company expects to witness food and paper inflation in 2023 between mid to high single digits.

Although overall comps have increased sharply, it is still far behind the pre-pandemic level in a few markets. In fourth-quarter 2022, comps in the China market were negative. Softening economy and COVID-related government restrictions have hurt comps in China.

A Brief Review of the Other Stocks

Yum China: The company has been benefiting from menu innovation, unit expansion and digitalization efforts. It is gradually shifting toward digital and content marketing to expand customer base. Also, focus on logistics center openings and supply-chain security bode well.

With a focus on improving customer experience and operating efficiency, YUMC stated continued investments in this direction. Restaurant margin in fourth quarter 2022 was 10.4%, up 290 basis points from the year-ago quarter’s levels. The growth was primarily a result of labor productivity, operational efficiency, temporary relief as well as initiatives to create a new base level for costs.

Jack in the Box: The company is benefitting from focus on menu innovations, delivery channels and marketing strategies. It is investing aggressively in store improvements and new store build, innovating via digital operations. Moreover, it is using its digital platforms for enhancing overall guest experiences and customer satisfaction.

In the fourth quarter 2022, comps at JACK’s stores increased 11.4% year over year against a decline of 4.4% reported in the prior-year quarter. The upside in comps was primarily due to an increase in average checks partially offset by a decline in traffic (for franchise).

BJ's Restaurants: The company is benefitting from initiatives like menu innovations, off-premise business model and unit expansion efforts. Also, focus on Brewhouse Beer Club bodes well.

BJRI is focused on creating a more iconic brewhouse signature food and drink menu items to drive incremental visits and spending in its restaurants. Also, it emphasized on refreshing its e-commerce platform with a new modern user experience and advanced functionality.

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