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McDonald's (MCD) Solid Growth Efforts & Comps Trend Bode Well

Zacks Equity Research

The year 2019 has so far turned out to be an encouraging one for the Retail-Restaurants industry. Year to date, the industry has rallied 13.4% compared with the S&P 500’s 10.4% increase. Also, McDonald's Corporation MCD, which belongs to the same industry, has gained 10.3% over the same time frame.

Notably, McDonald's is benefiting from various sales and digital initiatives as well as positive comparable sales. However, high labor costs and dwindling top line remain concerns. Let’s delve deeper.

Key Catalysts

McDonald’s sales boosting initiatives are driving global comparable sales (comps) higher. In first-quarter 2019, global comps grew 5.4%, marking its 15th straight quarter of positive comps. Also, U.S comps rose 4.5% in the same period.

In order to drive comps in the United States, representing about 40% of the company’s business, McDonald’s intends to improve its focus on increasing guest traffic. In this regard, the company is accentuating on operational excellence, product innovation, offering a value menu and rolling out more limited-time offerings. The United Kingdom reported 52 straight quarter of like-for-like sales growth.

Currently, Australia, Canada, France, Germany and Italy are all witnessing robust sales growth at McDonald’s. In addition, the company is undertaking digital initiatives to better serve customers, with nearly all of its U.S. restaurants using digital menu boards.

McDonald’s also continues to roll out mobile order and pay, with a new curbside check-in option. Already, it has launched the option in nearly all 20,000 U.S. restaurants. To provide augmented convenience to customers, McDonald’s is increasingly focusing on delivery. Markedly, the company provides delivery from more than 20,000 restaurants in above 75 countries.

Meanwhile, McDonald’s strategic efforts in the International Lead segment are steadily driving comps higher. In first-quarter 2019, the International Lead segment witnessed comps growth of 6% year over year, higher than a 5.2% rise registered in the last reported quarter. Robust sales in the United Kingdom and France, and positive results across all markets drove comps.

In the International Lead Markets including Australia, Canada, France, Germany and the UK, this Zacks Rank #3 (Hold) company is consistently making efforts to deliver solid performances. McDonald’s intends to boost comps growth in these markets through the 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

Revenue decline at McDonald’s has been weighing on the company’s performance for quite some time now. In the first quarter of 2019, the metric decreased 4% year over year, following a 3%, 7%, 12% and 9% decline in the fourth, third, second and first quarter of 2018, respectively. Further, the top line had declined a respective 11.4%, 13%, 7% and 4.7%, in the fourth, third, second and the first quarter of 2017. This downturn reflects the impact of the company’s strategic refranchising initiatives. During first-quarter 2019, revenues at the company-operated restaurants decreased 12% year over year to $2,240.5 million.

Of late, McDonald’s margins have been under pressure due to wage increases worldwide. Apart from minimum wage increases, additional health care costs related to ‘Obamacare’ in the United States induced a spike in labor costs. Furthermore, costs associated with brand positioning across all the key markets as well as ongoing investments in initiatives are likely to persistently dent margins, at least in the near term. Increased commodity costs are added concerns. In the first quarter, consolidated margins contracted 20 bps.

Key Picks

Better-ranked stocks worth considering in the same space include Chipotle Mexican Grill, Inc. CMG, Yum China Holdings, Inc. YUMC and Denny's Corporation DENN, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chipotle Mexican Grill and Yum China’s long-term earnings are likely to witness a 19.2% and 9.8% growth, respectively.

Denny's earnings surpassed the Zacks Consensus Estimate in two of the trailing four quarters, the average beat being 8%.

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