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McDonald's Bounces Back to Growth

By Demitri Kalogeropoulos - Jan 31, 2021 at 10:48AM

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The chain just barely managed its seventh consecutive year of growth in the U.S. market.

McDonald's (MCD 1.77%) just closed the books on a forgettable year for the business. COVID-19 continued to sink customer traffic across its global portfolio of stores through the end of 2020, the fast-food giant said in its recent earnings report. 

Yet McDonald's notched a few wins that point to a better 2021 ahead, assuming the pandemic threat fades over the next few months.

Let's take a closer look.

A man with a to-go food order.

Image source: Getty Images.

Growing in the U.S.

McDonald's steady rebound continued in the three months that ended in late December. Comparable-store sales were down just 1% globally, compared to a 2% drop last quarter and a 25% slump in fiscal Q2. Declining revenue isn't normally a cause for celebration, but management highlighted several bright spots in a tough year.

These include the fact that sales landed in modestly positive territory in the core U.S. market thanks to a quick shift to a drive-thru and home delivery focus. That result kept the chain ahead of peer Starbucks for the year, but trailing Chipotle Mexican Grill. "2020 will be remembered as one of McDonald's most challenging ... moments in our long history," CEO Chris Kempczinski said in a press release.

Earnings are down

The earnings picture is less encouraging and reflects the depth of the chain's operating slump in 2020. Profits in Q4 fell 9% after excluding currency exchange rate shifts, and were down 20% for the full year. That metric trailed McDonald's revenue trend thanks to extra costs related to COVID-19 safety and elevated marketing spending aimed at supporting franchisees.

The fast-food industry has become more competitive in recent months as national chains fight over pieces of a flat market.

MCD Cash from Operations (TTM) Chart

MCD Cash from Operations (TTM) data by YCharts

McDonald's finances endured a COVID-19 hit but they're still strong. Operating cash flow declined by roughly $2 billion in 2020 yet was solidly positive at $6.3 billion.

The chain continued spending cash on its growth initiatives like store remodels, product launches, and delivery. "By investing for the future and leveraging competitive strengths, we're confident we can continue to capture market share and drive long-term sustainable growth," Kempczinski said.

Looking ahead

Management didn't issue a forecast for the new fiscal year, but McDonald's is likely to report significant growth this year. The fiscal first quarter, which started a few weeks ago, is up against a prior-year period that included significant early impacts from the pandemic. Comps dove 13% in the U.S. in March last year and fell 35% in the company's core international segments. Both areas should see significant improvements when compared to those slumps.

The big question is when the chain can get back to setting sales and earnings records again on an absolute basis. Continued modest improvements like the one the chain just announced would mean McDonald's could reach that revenue mark in 2021. The profit rebound will take longer.

That means shareholders should brace for a volatile period ahead for the business, and for the stock, until the rebound path looks clearer by late 2021.

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