A 40% stock price rally last year made McDonald's (NYSE:MCD) one of the biggest gainers on the Dow as the fast-food titan engineered an impressive growth rebound. The rally also raises the stakes for the burger giant to continue impressing investors into 2018.
McDonald's initial shot at extending its positive momentum will come with its first-quarter earnings report, due out before the market opens on Monday, April 30. Let's take a look at what investors can expect from that announcement.
The rebound pace
Consensus estimates are calling for sales to drop by 12% to $4.97 billion. That decline isn't a sign of tough times in burger land, though. It's a consequence of a refranchising initiative that's lowering the chain's proportion of company-owned locations. Revenue fell 7% in 2017 as Mickey D's sold off stores to franchises and traded lower restaurant sales for higher franchise fees and royalties.
The more important number to watch is revenue from existing locations, or comparable-store sales. Comps hit their fastest rate in years in 2017 thanks to rising customer traffic. The 3.6% comps rate outpaced those of rivals including Yum! Brands, Shake Shack, and Dunkin' Brands. We'll find out on Monday whether its new value menu helped McDonald's extend those market-share gains into early 2018.
McDonald's became a significantly more profitable business last year as operating margin shot up to 41.9% of sales from 31.5% in 2016. Its market-leading sales growth helped, but the bigger contributor was its refranchising shift -- the company has sold 4,000 locations to franchisees in the last three years. This move provides a few financial benefits in addition to the higher profitability, including more predictable and stable revenue streams and increased efficiency. It's a key reason why Wall Street is expecting earnings to rise to $1.67 per share this quarter from $1.47 per share last year, even as reported sales decline.
CEO Steve Easterbrook and his team are expecting operating margin to keep ticking up toward the mid-40% range as the proportion of company-owned locations drifts toward 5% from the current 8% mark. The share was 19% just three years ago, which shows how aggressive the team has been in shifting to a fully franchised business model.
Down payment on growth
Mickey D's is hoping to press its hard-won sales momentum into 2018 through the usual mix of menu innovations, limited-time offers, and aggressive value pricing. At the same time, it is laying the groundwork for long-term growth mainly through a customer-experience overhaul that puts a priority on the digital sales channel. In fact, management is planning to spend $2.4 billion on modernizing its restaurants this year and adding mobile ordering and payment capabilities. Home delivery could be another long-term game changer, given that so many people live within just a few miles of a McDonald's location.
That $2.4 billion investment plan translates into a 20% boost over the prior year's spending, and it helps demonstrate why it's so hard for rivals to mount a serious challenge to the industry leader. The spending also adds weight to management's claim that they have "far greater ambitions" than the modest market-share rebound they achieved in 2017. McDonald's wants that success to mark just the beginning of a long stretch of healthy returns, and the company is willing to pay up to help ensure that happens.