McDonald's (MCD 1.42%) business is slowly getting back to normal. The fast-food chain's fourth-quarter earnings report, while marking another period of global sales declines, showed improving operating trends despite the ongoing pressure from COVID-19. The company even extended its annual growth streak in key markets like the U.S. and Australia.
In a conference call with Wall Street analysts, CEO Chris Kempczinski and his team talked about the competitive assets that allowed Mickey D's to grow in 2020 even as peers like Starbucks posted declines. Let's look at some highlights from that chat.
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Finishing a tough year on a high note
"While there were challenges across markets, some of our larger markets achieved positive comp sales for the full year, including the U.S., Japan and Australia, and that was on top of strong momentum coming into 2020," Kempczinski said.
Comparable-store sales bounced back into positive territory in the fourth quarter, growing 5.5%. That result put McDonald's ahead of Starbucks on its recovery path; the coffee titan announced a 5% sales decline in the U.S. segment.
Stepping back, sales were down 8% globally for the year, but McDonald's achieved modest gains in key markets, including the U.S., Japan, and Australia. The chain credits a swift push into delivery and drive-thru, popular menu introductions, and investments in creating a safe operating environment. "We know how to run great restaurants," Kempczinski said.
It's a different market
"The needs of our customers have changed," Kempczinski said. "They're dining in less and taking out more, visiting less in the morning and much more for lunch and dinner, and interacting with other people and brands, less in-person and more through digital."
McDonald's is operating under the assumption that many of the pandemic-related consumer shifts will be around for a while. That means the core lunch and dinner menus will be crucial in 2021 as breakfast visits stay pressured. The drive-thru and home delivery platforms are getting big upgrades, too, given that this channel doubled in markets like the U.S. just over the past year.
Rivals like Chipotle and Shake Shack are pouring resources into these convenient fulfillment offerings. But McDonald's is aiming to stay the global leader in drive-thru while scaling up its delivery platform. "We have big ambitions," Kempczinski said.
Winning where it counts
"We ultimately measure overall financial efficiency by our operating margin, as it serves as the most comprehensive gauge of our operating performance," CFO Kevin Ozan said. "We expect our operating margin percent to be in the low to mid 40s for 2021."
Last year ended McDonald's impressive streak of surging profitability, and that stumble contributed to several worsening financial metrics. Earnings, cash flow, and margins all dropped due to the combination of reduced sales and rising expenses in areas like labor, safety procedures, and marketing.
MCD operating margin (TTM) data by YCharts. TTM = trailing 12 months.
Management could have lessened that blow by pulling back on new store development, marketing spending, or investments in the digital selling platform. But it made the calculated bet that such a pullback would hurt the chain's long-term earnings power.
Investors should see some concrete returns from those decisions as profit power starts recovering in 2021. In fact, executives are calling for operating margin to return to the low 40% range by the end of the year.
