Profits are soaring for the iconic restaurant brand McDonald's (MCD -1.08%). After suffering a decrease in sales due to forced closures of its restaurants for in-person dining, McDonald's is bouncing back stronger than ever.
The Golden Arches delivered record earnings per share in its most recently completed fiscal year, even though the pandemic is far from over. Let's look closer at what's driving the improved performance at McDonald's.
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The pandemic forced McDonald's to embrace meal delivery
McDonald's runs on a franchise model; franchisees run over 90% of its locations. That gives the company the flexibility to expand to more places with relatively little fixed capital investment. McDonald's typically takes a percentage of sales from franchisees and an upfront fee for the privilege of opening a restaurant under its banner. The business model has undoubtedly helped it reach 40,000 locations globally and systemwide sales of $112 billion in 2021.
Further, the business formation model allows for excellent operating leverage. That means when sales increase, it boosts profitability by multiples. McDonald's most recently completed fiscal year was evidence of that idea. Revenue increased by 21% year over year, and earnings per share exploded by 59%. That warrants a closer look into what's driving sales growth.
MCD EPS Diluted (TTM) data by YCharts
The coronavirus pandemic was a time of forced innovation for businesses worldwide, and McDonald's was no exception. The company embraced third-party food delivery providers like Uber Eats and DoorDash. Consumers, unable to visit restaurants in person, flocked to these services by the millions. Orders for delivery were a big part of McDonald's massive growth in digital sales. Indeed, in 2021, digital sales accounted for 25% of McDonald's overall sales in its top six markets. That translates into $18 billion of online sales that may have otherwise been missed if it hadn't adjusted quickly in response to the outbreak.
That strategic alliance expands the geographical reach of each McDonald's restaurant -- and it opens the potential to reach a greater audience with greater frequency than ever before. Some customers who only visited McDonald's on their way home from work may now be willing to order on a weekend since they can choose the delivery option for only a few dollars more. It all points to McDonald's emerging from the pandemic as a more robust business than ever before.
A good time to buy McDonald's stock
MCD PE Ratio data by YCharts
The stock has arguably not yet responded to the company's improved prospects. Over the last decade, McDonald's has shown little revenue growth. The rise of digital ordering may be the catalyst that sparks a few hundred basis points of revenue growth over the next several years. Further, digital ordering will work toward improving profit margins. Sales made through the app reduce the need for franchisees to hire and retain cashiers and drive-thru personnel. And the expanded geographical reach makes the potential profitability of each restaurant higher, attracting more franchisees.
For all of those reasons, it could be an excellent time to buy McDonald's stock.
