McDonald's (MCD -0.42%) stock is down thus far in 2022, but the company itself is seeing success, thriving in this stage of the pandemic as enhancement in its digital capabilities boost sales and profits.
McDonald's reported record earnings per share (EPS) in 2021 as revenue surged higher by 21%. Those are phenomenal results for a company that has historically grown at a turtle's pace. Let's consider its recent figures to try to determine if it can sustain the momentum.
McDonald's is capturing the benefits of forced innovation
In its most recent quarter, which ended on March 31, McDonald's revenue increased by 11% year over year to $5.67 billion. Remarkably, systemwide digital sales -- the total value of sales at restaurants that originated through the company's mobile app, delivery services, and kiosks inside the restaurants -- exceeded $5 billion, representing 30% of total sales in its top six markets. McDonald's runs on a franchise business model, in which it takes a percentage of sales as royalties.
MCD Revenue (Quarterly YOY Growth) data by YCharts.
At the pandemic's onset, McDonald's was hit hard when COVID forced the closure of in-restaurant dining and revenue fell by 10% as a result. But the situation may have been a blessing in disguise as it led management to emphasize digital sales channels. These nontraditional sales channels reduce the staffing pressure on each restaurant. For instance, it signed deals with third-party food delivery aggregators. An order via one of those services reduces the need for McDonald's staff to take the order and process the payment, an essential benefit during acute labor shortages.
Further, delivery orders likely expand the reach of each location by allowing folks without a way to get to a McDonald's to order takeout. Overall, the improvement of the digital channel is a structural upgrade that could provide ongoing benefits.
Analysts predict an increase in earnings, decrease in revenue
The average analyst estimate is for McDonald's to report revenue of $5.82 billion and EPS of $2.46 for the second quarter, which ended at the end of June. If the company meets that EPS projection, it would be an increase of 3.8% from the adjusted figure from a year ago which excluded items including a one-time tax benefit in the U.K . Meanwhile, the revenue projection is down slightly from the $5.9 billion reported in the quarter last year. Remember, McDonald's announced it would end its operations in Russia following its invasion of Ukraine and that move is likely to muddy comparisons from the previous year. In its first-quarter report, the company said it had notched $127 million, $0.13 per share, of pre-tax operating expenses to "support the Company's businesses in Russia and Ukraine." That included $27 million for salaries and lease and supplier payments as well as $100 million for inventory that would have to be disposed of.
MCD Price to Free Cash Flow data by YCharts.
McDonald's is trading at a price-to-earnings ratio of 26.7 and a price-to-free-cash-flow ratio of 26.8. Those are historically average valuations for the restaurant chain. Given that the stock is not cheap and given the overall bearish sentiment clouding the market, it will take a considerably better than expected earnings performance to boost McDonald's stock price meaningfully after Q2 results.
Still, the company's investments in the digital channel have so far received consumers' vote of confidence. That enhancement will likely boost McDonald's sales and profitability in the longer term.
