Most investors know that fast-food giant McDonald's Corp. (NYSE:MCD) is in a tough spot. In the United States, consumers are flocking to newer concepts in the fast-food space or opting for fast-casual options. Overseas, McDonald's sales are getting hit hard by the rising U.S. dollar.
Since new CEO Steve Easterbrook took the helm, investors have eagerly awaited any signs of a turnaround they could get their hands on. The company's last quarterly report didn't make it seem as if much progress was made, but underneath the headline numbers, there are indeed some signs of hope.
The tide may be about to turn
On the surface, the last quarterly earnings report looked very weak. Global comparable sales, which measures sales at restaurants open at least one year, fell 0.7% last quarter, year over year. Total revenue declined 10% year over year. Earnings per share clocked in at $1.26, also a 10% decrease from the same period last year.
But at long last, things may finally be starting to turn around for McDonald's. First, the decline in total revenue was almost completely attributable to foreign exchange. The strengthening U.S. dollar is reducing revenue for all large U.S. multinationals, including McDonald's. Excluding foreign-exchange fluctuations, total revenue would have increased 1%.
And while global comparable sales declined yet again, last quarter represented the lowest decline in the past four quarters. The hope is that McDonald's can soon stem the decline in comparable sales, and management had some positive things to say about this. In fact, McDonald's expects comparable sales to increase slightly in the current quarter.
All-day breakfast a promising catalyst
Going forward, earnings may get another boost in the form of a rumored all-day breakfast, which CNBC reported could arrive as early as October. McDonald's instituted a test of the all-day breakfast concept earlier this year and reportedly has seen such strong results that it could expand all-day breakfast nationwide in just a few months.
This could be a big win for McDonald's on multiple fronts. First, the idea could help increase traffic. Breakfast at McDonald's is popular with consumers. Since guest traffic declined in all of its major geographic segments last quarter, bringing more customers through the doors is a good start.
Moreover, shifting guest tickets from lunch and dinner items toward breakfast items may boost profit margins. McDonald's may be able to sell more higher-margin drinks from its McCafe line, and breakfast products such as eggs and flour carry lower raw-materials costs than beef.
Cash-generating abilities remain intact
Another factor working in the company's favor is that even though comparable sales are declining, the company still commands high margins and free cash flow. McDonald's produced an 18.5% net profit margin last quarter. Compare that figure with one of its fiercest competitors in the fast-food industry, The Wendy's Company, which generated just a 5.8% net profit margin last quarter.
Moreover, McDonald's still generated $1.3 billion of free cash flow last quarter, and the company returns a lot of its free cash flow to investors. McDonald's returned $2.5 billion to investors last quarter through dividends and share repurchases. The stock offers a hefty 3.5% dividend yield, which pays investors well to wait for the turnaround to gain traction. And it's likely McDonald's will raise that dividend later this year, as it's a Dividend Aristocrat and typically increases its payout in the fourth quarter.
As a result, while it's too soon to outright declare the McDonald's turnaround a success, there are at least promising early signs that a recovery is on the horizon.