Please ensure Javascript is enabled for purposes of website accessibility

3 Things to Watch in McDonald's Upcoming Earnings Report

By Demitri Kalogeropoulos – Updated Apr 27, 2018 at 3:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These are the numbers that investors want to see when Mickey D's posts earnings next week.

A 40% stock price rally last year made McDonald's (MCD -1.07%) 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.

Four young people sharing a fast-food meal.

Image source: Getty Images.

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.

Greater profits

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.

MCD Operating Margin (TTM) Chart

MCD Operating Margin (TTM) data by YCharts.

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.

Demitrios Kalogeropoulos owns shares of Dunkin' Brands Group and McDonald's. The Motley Fool is short shares of Shake Shack. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

McDonald's Corporation Stock Quote
McDonald's Corporation
$234.40 (-1.07%) $-2.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.