Investors are optimistic about McDonald's (MCD +1.28%) earnings report, set to publish before the market opens on Tuesday, July 25. The stock has risen more than 20% so far this year to make the fast food titan one of the best-performing members of the Dow.
Let's look at the key trends that could keep that rally going for shareholders next week.
Going for growth
In early March, Mickey D's detailed a rebound plan that aims to stop the market share losses that have kept a lid on sales growth over the past few years. The strategy leans on menu improvements like an expanded all-day breakfast offering.
Image source: McDonald's.
It also includes raising food quality through sourcing shifts like a move to cage-free eggs and antibiotic-free chicken. The hope is that, by getting in front of consumers' changing food demands McDonald's won't be playing catch-up against quick-service rivals any more. "I believe the moves we are making will reassert McDonald's as the global leader" in the industry, CEO Steve Easterbrook told investors.
The latest operating results show encouraging progress on this score. Last year's comparable-store sales gains were 3.8% to mark McDonald's best growth showing since 2011. Fiscal 2017 continued the positive momentum as gains ticked up to a 4% rate. Investors will be looking for another quarter of healthy comps this week. Customer traffic trends will be key to watch. Guest counts ticked up by less than 1% last quarter following a slight decline through all of 2016.
Profit spike
McDonald's is engaged in a massive refranchising initiative that will bring the share of corporate-owned locations down to just 5% over the next few years from 15% today. In exchange for the revenue it loses in the trade, the company will raise tons of cash, much of which it aims to direct toward store upgrades.
McDonald's profitability should spike, too. Its franchise model means that most of its earnings come from the fees, royalties, and rent that it charges its business partners. That's how the company can enjoy operating margins of over 30%, or roughly double what Chipotle was posting before the food safety scare sent profits plunging. A higher proportion of franchised stores will only widen McDonald's profit lead over peers.
MCD Net Income (TTM) data by YCharts
The company plans to sell 4,000 of its company-owned restaurants this year, and that helps explain why Wall Street is expecting lower sales but much higher profits. Consensus estimates call for revenue to drop 5% this quarter to below $6 billion while earnings jump 12% to $1.62 per share.
Looking ahead
In addition to the menu tweaks, McDonald's has two big ideas to better-position the company for growth over the next few years. First, it is adding tons of technology to its restaurants, including kiosks that allow guests to skip lines entirely. Online ordering and payment will work in the stores and with drive-thru clients, too, so that customers just need to read their order code to the crew and proceed to pick up their food. The company is expecting to have this functionality in about 20,000 restaurants, mostly in the U.S., by the end of the year.
Looking further out, delivery might make the biggest difference to its growth outlook. With about 75% of the U.S. population living less than 3 miles from a McDonald's restaurant, there's a huge potential market to be served if the company can find the right fulfillment model to roll out nationally, and executives are working on cracking that issue right now.
