McDonald's (MCD +1.55%) is set to close the books on its fiscal year before the market opens on Tuesday, Jan. 30. The fast-food giant wowed investors with its last two quarterly announcements, but will this next report keep that tasty streak alive?
Let's take a closer look at what investors can expect next week.
Image source: Getty Images.
Growth momentum
In late July, McDonald's announced its fastest quarterly growth pace in over five years. Comparable-store sales spiked higher by 6.6% as customer traffic improved across each of its geographic selling regions. Notably, comps more than doubled in the U.S. market -- rising to a 3.9% pace from 1.7% in the prior quarter.
The expansion pace slowed down in the third quarter but still demonstrated market-thumping growth. McDonald's 6% comps gain was twice the rate that rival Yum! Brands (YUM +2.05%) managed across its KFC, Pizza Hut, and Taco Bell franchises. Better burger upstart Shake Shack also lagged far behind with its 2% comps decrease. Starbucks' (SBUX +1.64%) comps were a weaker 2%, too.
Looking beyond that headline growth number, Mickey D's shareholders are expecting to see healthy customer traffic momentum on Tuesday. The metric was a solid 2.1% through the first nine months of 2017, but it might tick higher considering it accelerated between the second and third quarters. In any case, the chain appears set to log significant annual traffic growth for the first time since fiscal 2012, which is even more impressive given that peers struggling with flat or negative guest count trends.
Improving finances
Consensus estimates are calling for revenue to decline by 13% to $5.23 billion, but that slump is just a consequence of an aggressive refranchising program that's lowering McDonald's share of corporate-owned locations to roughly 5% from 20% in 2014. The fast-food titan gives up restaurant revenue when it sells these chains to franchisees, but in exchange, it collects a higher proportion of those profitable royalties, franchise fees, and rent charges.
The result is a smaller business that generates bigger profits. Through the first three quarters of 2017, for example, revenue is down 6% while net income has surged 30% higher.
MCD Operating Margin (TTM) data by YCharts.
CEO Steve Easterbrook and his team have targeted operating margin in the mid-40s range by 2019 -- up from the low 30s a few years ago -- mainly thanks to this refranchising move. But management might boost that goal, or speed up the deadline, based on the latest operating trends.
Competitive threats
Many competitors are trying to knock McDonald's back off the industry leadership perch it has just recaptured. These include traditional fast-food rivals, but also Starbucks, which is using a new lunch menu to push deeper into food this year. The coffee titan believes a robust afternoon rush will help get food sales up to 25% of the business by 2019 from 20% last year. That target makes it likely the rivalry with McDonald's will quickly expand beyond just espresso-based beverages.
McDonald's also faces challenges to its plan to dominate the fast-food delivery segment. Yum Brands' KFC is just one example, where management is aiming to double the delivery business to over $2 billion by 2020.
Management's early outlook for 2018 will reflect those competitive threats while also showing whether the new value menu is resonating with customers through its first month of availability. That aggressive pricing strategy is an important weapon in McDonald's fight to extend the strengthening sales rebound that started with the introduction of all-day breakfast offerings in late 2015.
