McDonald’s Earnings: 3 Things to Watch

The burger giant steps up to the earnings plate on Friday, July 26.

Demitrios Kalogeropoulos
Demitrios Kalogeropoulos
Jul 22, 2019 at 5:10PM
Consumer Goods

Investors have been mostly happy with McDonald's (NYSE:MCD) solid operating results lately. Sales growth accelerated in the fiscal first quarter, and the fast-food giant set another record for profitability.

Those wins implied that the chain's aggressive rebound plan, which involves its heaviest spending ever on its store base in the U.S., might finally be bringing that market up to the robust growth levels shareholders have seen in places like western Europe. Investors will be looking for confirmation that this rebound strategy is on track when Mickey D's reports its results on Friday, July 26.

Four friends eating fast food.

Image source: Getty Images.

1. Growing at home

McDonald's has been trying for almost a year to get the U.S. segment growing quickly again. Comparable-store sales were stuck at just 2% in the final two quarters of 2018, compared with around 6% internationally. The chain's main problem was falling customer traffic, which was partly driven by intense competition for fast-food spending.

McDonald's announced an encouraging acceleration in the U.S. last quarter, and executives said the rebound likely had something to do with their $2 billion remodeling plan. Shareholders will find out this week whether the chain built on that early momentum, or if customer traffic slipped lower yet again.

Menu introductions will be a key factor in any potential rebound, but CEO Steve Easterbrook and his team are making bigger changes aimed at driving fundamentally faster growth from here. These include fitting stores with modern appointments, digital menus and ordering kiosks, and online ordering and delivery. These initiatives have powered a better dining experience for customers outside of the U.S., and so it makes sense to think fast-food fans at home will respond just as enthusiastically.

2. Record profits

The industry is dealing with rising costs on key inputs such as food ingredients, labor, and transportation. But McDonald's has still managed to boost profits into record highs. Operating margin last quarter hit a market-trouncing 42.3% of sales from 41.7% a year ago. Yum Brands' (NYSE: YUM) comparable figure was 34.5%.

Most of the biggest gains from McDonald's refranchising initiative have already helped earnings, and the chain is close to its long-term goal of franchising out at least 95% of its stores. However, investors are still hoping for profitability improvements. Management has targeted operating margin in the mid 40% range over the long term, which leaves room for that figure to inch higher in the next few quarters and years.


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3. Delivery updates

The next battleground for restaurant stocks is home delivery, and McDonald's is determined to lead in this shift. It has already added the functionality to 20,000 of its locations to push sales past $3 billion. But the chain's uniquely dense store network makes it ideally suited to become one of the biggest delivery companies -- of any industry -- over time.

That attractive potential means Easterbrook and his team will likely discuss the delivery rollout in detail on Friday. McDonald's has had successes to celebrate in international markets over the last few quarters, but these past few months marked an important effort to educate U.S. consumers about its food delivery options. If the chain did a good job rolling out that service and marketing it to fast-food fans recently, then delivery could be another factor supporting market share growth in 2019 and beyond.