Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Is Q2 When McDonald's Investments Begin to Pay Off?

By Rich Duprey - Jul 23, 2019 at 1:05PM

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

The fast-food chain has put a lot of time and money into improving its menu and operations.

Raising prices and introducing more expensive menu items has allowed McDonald's ( MCD -0.17% ) to post higher same-store sales (and please franchisees with the better margins), but declining foot traffic at the fast-food joint's U.S. locations remains its weak link.

The burger titan has been investing heavily in technology and automation to decrease order turnaround time to help push those numbers higher. McDonald's will post second-quarter earnings on Friday, July 26. Let's see what investors might expect to hear.

McDonald's bacon burgers

Bacon makes everything taste better. Image source: McDonald's.

Menu and technological improvements

When in doubt, add bacon, and that's what McDonald's did in the first quarter, holding a national "Bacon Event" that saw the tasty meat strips added to Big Macs, Quarter Pounders, and even Cheesy Bacon fries. The restaurant credited bacon with helping to push sales higher, along with the 2-for-$5 discount bundle the chain added in recognition of the promotional atmosphere running through the burger industry.

Because the floor was raised from the $4 promotions that were previously in effect, it added a few more pennies of profit to each order, but also helped McDonald's to keep pace with the promotions from Wendy's and Burger King. The competitive environment remains fierce in fast food, which is why McDonald's technology investments are important.

Hundreds of drive-thrus have been outfitted with the artificial intelligence capabilities from its Dynamic Yield acquisition. The system uses data collected from its millions of customers served daily to make order suggestions based on factors like time of day, weather, menu items that are trending, andwhat the customer has already ordered. It will eventually be added to all of McDonald's digital access points, such as mobile ordering and self-order kiosks. 

CEO Steve Easterbrook has said the technology offers the added benefit of increasing average ticket amount because when customers control the ordering, they end up spending more.

Labor and delivery will be key items

We'll likely hear that McDonald's has expanded the presence of such innovations at more restaurants during the quarter, and possibly how its new kitchen technology improvements are faring. For example, a new automated process for dunking fries, fish patties, and other items into fryers is now being tested in a handful of kitchens -- ostensibly to assist employees with their workflow, but eventually it has to mean fewer employees are hired.

McDonald's continues to face high labor cost pressures due to its own actions of raising wages, as well as nearly two dozen states raising the minimum wage. CFO Kevin Ozan said it was safe to say "labor inflation is going to continue to be a challenge."

Delivery will also be an important component of McDonald's growth program. Easterbrook said it had grown to a $3 billion business globally through its partnership with Uber Eats. It now offers delivery in over 20,000 restaurants across more than 75 countries, but McDonald's just ended the exclusivity contract it had with Uber and will now also use DoorDash to deliver food for over 200 McDonald's locations across Houston.

The bottom line is expanding

Analysts forecast revenue to be essentially flat in the second quarter, coming in at $5.33 billion, just slightly below the $5.35 billion McDonald's posted last year. But Wall Street foresees profits widening in the period, growing to $2.06 per share from $1.99 per share a year ago. That would undoubtedly come from the focus on more premium menu items even as it streamlines its menu to make it easier to compile orders and make the order process faster.

McDonald's has a lot of initiatives at play and the many moving parts all impact different aspects of the business, but they're all aimed at building a better burger shop, and the investments should start paying off -- perhaps as soon as the second quarter.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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
$244.18 (-0.17%) $0.42
The Wendy's Company Stock Quote
The Wendy's Company
$20.38 (-0.97%) $0.20
Uber Technologies, Inc. Stock Quote
Uber Technologies, Inc.
$36.02 (-5.21%) $-1.98

*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 service.

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 12/02/2021.

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

Our Most Popular Articles

Premium Investing Services

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