McDonald's (NYSE:MCD) has a customer traffic problem that it thinks $1.6 billion of spending might fix. That's the total capital outlay the fast-food titan allocated for 2018 to remodel and modernize its U.S. restaurants in its largest construction project to date.
The chain's fiscal fourth-quarter report is set for Jan. 30, and the announcement should give investors a good picture of whether that plan is working. Let's take a closer look.
Growth at home
The biggest clue will come from Mickey D's growth rate in the U.S. market. After all, while the restaurant giant has posted industry-leading global sales figures lately, most of those gains have come from its international geographies. The company credited last quarter's 5.4% comparable-store sales bounce in markets like Australia and France for supporting the overall 4% global increase. But the U.S. segment plugged along at a much slower 2.4% boost.
More importantly, customer traffic dropped in the U.S. market for the third straight quarter, meaning all of McDonald's recent growth has come from higher spending per visit. That's not a sustainable expansion scenario, which explains why management has pushed the accelerator button on its U.S. modernization program.
The chain expects to have remodeled about 3,000 stores last quarter, adding things like digital ordering kiosks and new mobile order, pay, and pickup functionality. These upgrades already happened in most of its international markets, where they supported faster growth. We'll find out this week whether they had the same impact in its home market.
McDonald's has reaped huge financial rewards from its refranchising move that's seen its proportion of company owned locations fall to 7% from 15% just a few years ago. By trading low-margin food sales for highly profitable franchise fees, rent, and royalties, operating margin has shot up to 40% of sales from below 30%.
Investors can expect to see more gains from this shift as the company moves toward its long-term goal of operating just 5% of its restaurants and lifting its operating margin up to the mid-40% range. That trend, plus lower tax expenses, helps explain why most investors who follow the stock are expecting earnings to rise to $1.88 per share in the fourth quarter from $1.71 per share a year ago, even as sales slip 3% to $5.2 billion.
It's likely that McDonald's will have delivered about $8 billion to shareholders through the full 2018 year, with close to $6 billion of that total coming from stock repurchases and the rest accounted for by dividend payments. The spending is well supported by improving cash flow, and gains there helped convince management to boost the dividend by a market-thumping 15% last quarter. In other words, McDonald's strengthening finances are allowing the company to scale up its investments in its restaurants while still lifting the direct cash returns made to shareholders.
Still, while it's nice to see dividends march higher, the real strength of the business over the long term has come from the fact that McDonald's can productively invest more cash into it at attractive rates of return. Its huge remodeling initiative represents its most aggressive move yet in that arena, so its results should play a big role in determining whether the chain remains an attractive stock into 2019 and beyond.
Check out the latest McDonald's earnings call transcript.