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McDonald's Set to Grow on Strategic Measures, Risks Remain
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On Mar 24, we issued an updated research report on burger giant, McDonald’s Corp. (MCD - Free Report) .
This leading fast-food chain currently operates over 36,000 restaurants in more than 100 countries.
Sales Efforts for its Key Markets
In order to boost comps in the U.S., which represents a major portion of the company’s business, McDonald’s is focusing on product innovation, offering a value menu and rolling out more limited-time offerings.
Despite these initiatives, the company’s comps in the U.S. segment declined in the fourth quarter of 2016, given tough year-over-year comparisons, after increasing for five consecutive quarters. Nevertheless, increased focus on improving guest count, rollout of the second phase of All Day Breakfast and its national value platform – McPick 2 – should bring back the segment’s growth on track.
In addition, the company is undertaking digital initiatives to better serve customers, with nearly all its U.S. restaurants now using digital menu boards. Also, per recent reports, McDonald’s has begun testing mobile order-and-pay capabilities on its app in the U.S. Adding mobile to its ordering options is expected to boost speed and convenience for customers, and given McDonald's large footprint in terms of locations, this should logically boost sales and enhance the company’s competitive position against rivals.
Moreover, McDonald’s is trying to improve its performance in the International Lead Markets, which include 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 along with improved services.
In fact, global comps at McDonald’s have been positive over the past six quarters.
Increased Focus on Franchising
Currently, more than 80% of the company’s restaurants are franchised and the company aims to refranchise 4,000 of its restaurants in the three-year period ending 2017, with the long-term goal of becoming 95% franchised. Increased focus on refranchising will reduce the company’s capital requirements and facilitate EPS growth and ROE expansion over the long term.
Moreover, the company has entered into various partnerships in order to streamline its business and focus on the quality of its offerings, which should further increase the attractiveness of McDonald's business. Thus, these deals will have an upside impact on earnings and margins as the company is expected to gain from trimming its overall cost of operations and preserving its capital.
Headwinds
The company’s margins are expected to remain under pressure in the first half of 2017, given high labor costs as well as expenses associated with brand positioning in all the key markets.
With about 40% of McDonald’s operating income coming from the international lead segment and over 10% from the high-growth markets, the company’s earnings remain vulnerable to negative currency translation.
Apart from these threats, McDonald’s is grappling with difficulties like decelerating growth in Asia as well as weakness in some parts of Europe, where the economic/political conditions are expected to be further challenging post Brexit. A challenging sales environment in the U.S. restaurant space is further likely to keep the top line under pressure.
Bottom Line
McDonald’s shares have gained 10.7% over the past six months as against the Zacks categorized Retail–Restaurants industry’s loss of 0.7%. Moreover, McDonald’s earnings surpassed the Zacks Consensus Estimate in each of the past ten quarters, with the trailing four-quarter average earnings surprise coming in at 5.67%.
Moving ahead, the turnaround plan announced by CEO Steve Easterbrook, in May 2015, is likely to continue bolstering earnings. Meanwhile, various sales and digital initiatives undertaken by the company should continue to drive comps and help fight macroeconomic and currency woes.
The Zacks Consensus Estimate for Papa John’s 2017 earnings climbed 1.4%, over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 10.26%.
Dave & Buster's earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 19.20%. Meanwhile, for 2017, EPS (earnings per share) is expected to improve 14.9%.
Darden’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 2.57%. Further, for fiscal 2017, EPS is expected to grow 11.3%.
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McDonald's Set to Grow on Strategic Measures, Risks Remain
On Mar 24, we issued an updated research report on burger giant, McDonald’s Corp. (MCD - Free Report) .
This leading fast-food chain currently operates over 36,000 restaurants in more than 100 countries.
Sales Efforts for its Key Markets
In order to boost comps in the U.S., which represents a major portion of the company’s business, McDonald’s is focusing on product innovation, offering a value menu and rolling out more limited-time offerings.
Despite these initiatives, the company’s comps in the U.S. segment declined in the fourth quarter of 2016, given tough year-over-year comparisons, after increasing for five consecutive quarters. Nevertheless, increased focus on improving guest count, rollout of the second phase of All Day Breakfast and its national value platform – McPick 2 – should bring back the segment’s growth on track.
In addition, the company is undertaking digital initiatives to better serve customers, with nearly all its U.S. restaurants now using digital menu boards. Also, per recent reports, McDonald’s has begun testing mobile order-and-pay capabilities on its app in the U.S. Adding mobile to its ordering options is expected to boost speed and convenience for customers, and given McDonald's large footprint in terms of locations, this should logically boost sales and enhance the company’s competitive position against rivals.
Moreover, McDonald’s is trying to improve its performance in the International Lead Markets, which include 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 along with improved services.
In fact, global comps at McDonald’s have been positive over the past six quarters.
Increased Focus on Franchising
Currently, more than 80% of the company’s restaurants are franchised and the company aims to refranchise 4,000 of its restaurants in the three-year period ending 2017, with the long-term goal of becoming 95% franchised. Increased focus on refranchising will reduce the company’s capital requirements and facilitate EPS growth and ROE expansion over the long term.
Moreover, the company has entered into various partnerships in order to streamline its business and focus on the quality of its offerings, which should further increase the attractiveness of McDonald's business. Thus, these deals will have an upside impact on earnings and margins as the company is expected to gain from trimming its overall cost of operations and preserving its capital.
Headwinds
The company’s margins are expected to remain under pressure in the first half of 2017, given high labor costs as well as expenses associated with brand positioning in all the key markets.
With about 40% of McDonald’s operating income coming from the international lead segment and over 10% from the high-growth markets, the company’s earnings remain vulnerable to negative currency translation.
Apart from these threats, McDonald’s is grappling with difficulties like decelerating growth in Asia as well as weakness in some parts of Europe, where the economic/political conditions are expected to be further challenging post Brexit. A challenging sales environment in the U.S. restaurant space is further likely to keep the top line under pressure.
Bottom Line
McDonald’s shares have gained 10.7% over the past six months as against the Zacks categorized Retail–Restaurants industry’s loss of 0.7%. Moreover, McDonald’s earnings surpassed the Zacks Consensus Estimate in each of the past ten quarters, with the trailing four-quarter average earnings surprise coming in at 5.67%.
Moving ahead, the turnaround plan announced by CEO Steve Easterbrook, in May 2015, is likely to continue bolstering earnings. Meanwhile, various sales and digital initiatives undertaken by the company should continue to drive comps and help fight macroeconomic and currency woes.
Zacks Rank & Stocks to Consider
McDonald’s has a Zacks Rank #3 (Hold). Some better-ranked stocks in this sector include Papa John's International Inc. (PZZA - Free Report) , Restaurant Brands International Inc. (QSR - Free Report) and Darden Restaurants, Inc. (DRI - Free Report) . 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.
The Zacks Consensus Estimate for Papa John’s 2017 earnings climbed 1.4%, over the past 60 days. The company’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 10.26%.
Dave & Buster's earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 19.20%. Meanwhile, for 2017, EPS (earnings per share) is expected to improve 14.9%.
Darden’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, with an average beat of 2.57%. Further, for fiscal 2017, EPS is expected to grow 11.3%.
More Stock News: This Is Bigger than the iPhone!
It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 27 billion devices in just 3 years, creating a $1.7 trillion market.
Zacks has just released a Special Report that spotlights this fast-emerging phenomenon and 6 tickers for taking advantage of it. If you don't buy now, you may kick yourself in 2020. Click here for the 6 trades >>