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Here's Why the Best Is Yet to Come for McDonald's

By Rick Munarriz - Mar 2, 2017 at 1:07PM

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The world's largest restaurant operator by sales volume is making sure that tech and franchisee math work in its favor in the future.

The world's largest burger chain moved higher on Wednesday after announcing progress on some growth initiatives, and this could be just the beginning for McDonald's (MCD 2.46%). The restaurant operator hosted its annual investor day yesterday, delighting shareholders with a surprisingly robust long-term growth target and big moves to ride hot tech trends. 

McDonald's sees its long-term systemwide sales climbing at a 3% to 5% annualized clip. The chain is also targeting an operating margin in the mid-40% range and a return on incremental invested capital in the mid-20% range.

It won't be a passive experience for investors. Mickey D's announced plans for a cash return of $22 billion to $24 billion through the next three years. A big part of making McDonald's more of a money tree is a plan to hand over more of its company-owned units to franchisees. It expects to refranchise 4,000 locations this year, and once that's complete, a whopping 93% of its eateries will be owned and operated by franchisees. 

The refranchising initiative is smarter than you probably think. In an era with rising labor costs and activists clamoring for the chain to pay its front line more, signing over company-owned restaurants would shift the payroll tab to franchisees and decentralize the target of activist ire. McDonald's will just sit back and collect fat royalty checks, and it's committed to shaving its general and administrative costs by another 5% to 10% in that scenario. 

Comparing the Big Mac in size to a smaller and larger version.

Image source: McDonald's.

Tech is the Big Mac's special sauce

McDonald's is already making a big push to feed smartphone-wielding millennials. It has made its app more appealing with daily deals that get scanned for discounts. However, the next big step will happen this year, as McDonald's expects to have 20,000 restaurants on its new platform where orders can be placed and paid for within the app. 

There's also the "Experience of the Future" initiative that it's been rolling out through Europe, outfitting restaurants with tablets that can place orders as well as entertain customers. The platform will expand closer to home now.

McDonald's is also beefing up its delivery efforts. It rang up $1 billion in sales through delivery last year, but most of those transactions happened in Asia and the Middle East. It's now looking at third-party solutions that will help it scale quickly globally in this game.

McDonald's has tried to counter the growing popularity of "better burger" chains by improving its quality, and now mobile orders, tableside tablets, and delivery will give it the tech muscle to combat a marketplace where convenience is paramount.

It wasn't just McDonald's shareholders applauding Wednesday's announcements. Credit Suisse analyst Jason West boosted his price target on the stock following the annual investor day. His goal for the stock is rising from $130 to $137.

McDonald's may have disappointed the market with a 1.3% decline in stateside comps after a year of bouncing back on the strength of its all-day breakfast, but now it has the toys and cash-management savvy to remain at the top of the hill. 

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