McDonald's (MCD +0.60%) has treated investors to market-thumping growth in its last few quarterly reports. And those gains have combined with surging profitability to send earnings far higher.
Yet shareholders saw evidence of a slowdown when the fast-food giant kicked off its fiscal 2018 in a late April report. That potential shift raises the stakes around Mickey's D's second-quarter report, due out before the market opens on Thursday, July 26.
Let's take a closer look.
Image source: Getty Images.
Growth trends
Comparable-store sales held steady at an industry-leading 5.5% last quarter, which kept McDonald's well ahead of rivals including Starbucks, Yum! Brands, and Dunkin' Brands. Management credited improvements to the menu, aggressive pricing, and faster service for powering the company's 11th consecutive quarter of positive comps. "More customers are recognizing that we are becoming a better McDonald's, appreciating our great tasting food, fast and friendly service, and compelling value," CEO Steve Easterbrook said .
Traffic change by fiscal year. Data source: McDonald's. Chart by author.
However, while customer traffic trends were positive on a global basis, they slipped into negative territory in the key U.S. market. All of its peers are struggling with the same challenge, but the restaurant chain is still hoping to get back to growth with help from menu innovations like the national rollout of its fresh-beef Quarter Pounder. On Thursday, we'll find out if these traffic-boosting initiatives worked, or if McDonald's trends were again pinched by the negative trends in the broader fast-food industry.
Profit margin
Mickey D's has been aggressively whittling down the proportion of restaurants that it operates in favor of relying more heavily on franchising. Its company-owned locations stood at just 8% last quarter compared to 15% in the year-ago period.
The refranchising move has pushed overall revenue lower while lifting profits as McDonald's trades low-margin food sales for high-margin rent, royalties, and franchise fees. As a result, operating margin has shot up to 41% of sales from 31% just a year ago. Investors are looking for more gains on this score, but at a slightly slower pace than in recent quarters.
By 2019, in fact, management is targeting operating margin in the mid-40% range, which should support its annual earnings growth target in the range of 7% to 9%. McDonald's is aiming to get its company-owned restaurant proportion down to about 5% over the long term, and it will likely announce more progress along those lines this week.
Modernization updates
McDonald's planned capital expenditure outlay in 2018 is up 20% over last year's rate, to $2.4 billion. And while that extra spending might not sound like a lot, it amounts to an aggressive investment pace, even for the industry leader.
The chain is modernizing and upgrading around 1,000 stores each quarter in the core U.S. market, or about the same total as its entire footprint in Australia. Executives believe this is the best way to improve customer traffic and average spending metrics while preparing the restaurants for a shift toward digital ordering and, down the line, home delivery.
The spending reflects just how quickly tastes are changing in the fast-food industry. It also shows that McDonald's is determined to avoid repeating the mistakes that contributed to a painful multiyear stretch for the business that included a brutal 4% drop in customer traffic in fiscal 2014. The chain aims to protect its hard-won leadership position this time, and that will require a more flexible, and aggressive, competitive stance.
