McDonald's (MCD -2.94%) shares had been keeping pace with the broader market's rally last year -- right up until late October. That's when the fast-food giant's stock fell in the wake of soft third-quarter results.
The chain posted strong global sales growth and industry-leading profitability. However, there was no evidence of the U.S. rebound that executives have been targeting for over a year. The Q3 report also raised questions about whether Mickey D's can thrive in an environment where consumers opt for delivery over carry-out or drive-thru options.
Its fourth-quarter earnings report should add clarity around these challenges while also helping investors learn the priorities of Chris Kempczinksi, who recently took over the CEO position following the abrupt exit of Steve Easterbrook in early November.
Let's take a look at three things to expect when McDonald's reports results on Wednesday, Jan. 29.
1. Traffic for the U.S. market keeps shrinking
Easterbrook still led the restaurant giant in late October when McDonald's reported what he described as "strong" global results. That's a fair assessment, given that comparable-store sales rose 5.9% to stay roughly steady with the prior quarter. The chain grew much more quickly than peers like Yum! Brands, Domino's Pizza, and Shake Shack. It even edged past Starbucks' impressive expansion pace.
But customer traffic trends have been another story. In the core U.S. market, traffic continued shrinking last quarter as it has for about two years. Starbucks, on the other hand, noted a 3% increase in traffic and a 3% boost in average spending. Investors are hoping to see a similarly balanced result from McDonald's this week, but the chain has had to rely entirely on increased average spending through most of fiscal 2019.
2. Delivery challenges related to promotional pricing
The slow growth in the U.S. might have something to do with the flood of third-party aggregators that are delivering food to homes and businesses today. Right now, many of these companies are offering promotional pricing in hopes of winning market share, and that situation appears to be hurting established national giants like Domino's and McDonald's.
We'll find out this week whether McDonald's sees this issue harming the business into 2020, or if management is as bullish as ever on the new sales channel. Back in October, executives noted that delivery sales were pushing up guest satisfaction while lifting average spending. Results are even better in markets like France and Australia, though, so look for the chain to do its best to close that gap over the next few quarters.
3. Clues provided regarding the financial steps forward
Most rival restaurant chains would kill for McDonald's 44% operating margin. But investors have been disappointed to see that core profitability figure hold steady for the last year after surging higher since 2015. That increase was powered by the chain's refranchising initiative, and now that this program is complete, it's not likely that shareholders will see much more growth here.
Yet the extra resources give McDonald's plenty of cash it can direct toward more store investments, which the company might outline this week. It's also likely the chain will hint at a new capital return program considering it will easily meet its goal of returning $25 billion through stock repurchases and dividends in fiscal 2016 through 2019.