McDonald's Q3 FY 2016 Earnings Preview: Top Line To Be Weighed Down By Industry-Wide Declines

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Key Trends:

  • McDonald's has proposed a "Happy Meal" for breakfast for kids, and started a pilot test for the product in two regions, Tulsa and Oklahoma, in over 70 restaurants. If successful, we can expect a nation-wide roll-out of the first new entree for Happy Meals in more than 30 years, which, in turn, could help the company annex a larger slice of the restaurant market.
  • Expanding its all day menu to include items like McGriddles, hotcakes, sausage burritos, oatmeal, and hash-browns, in addition to McMuffin and biscuit sandwiches, introduced in September, in order to keep the buzz around All Day Breakfast alive.
  • Initiatives such as shifting from margarine to butter, piloting fresh patties, transitioning to free range eggs, and removing preservatives from some of its food items, to project the image of healthy and nutritional food.
  • Use improved technology to allow customers to customize food, improve customer service, and increase satisfaction, while boosting efficiency, and gathering valuable data on local tastes.
  • To revive its business in the China/Asia Pacific region, McDonald's has come up with a new strategy which entails selling-off  some 2,800 odd restaurants in China, Hong Kong, and Korea. This will essentially lead to the company-operated restaurants being converted into independently run franchisees.
  • The softening in company-operated revenues is expected to continue primarily due to the negative impact of refranchising, as the company-operated sales will be increasingly replaced by franchised revenues in the form of rent and royalty, based on a percentage of sales.
  • Focus on completion of its three-year $30 billion share buyback target, in order to support the bottom line, even as the top line continues to suffer.
  • An industry-wide slowdown due to a lesser number of people eating out. This is being speculated to happen due to grocery prices lagging behind menu prices, discouraging people from eating out. The trend is confirmed by September same store sales and traffic data, showing a decline of 1.1% and 3.5%, respectively. The high costs of labor and healthcare further worsen the situation for the restaurant industry, by causing people to substitute spending on eating out on more basic necessities of healthcare.

Have more questions on McDonald's? See the links below.

  • How Much Upside Can Sustained Demand For "All Day Breakfast" Drive For McDonald's?
  • How Can McDonald's Stock Price Be Affected By The Trend Towards Healthy Eating In The Next Year?
  • The Continued Struggle Of The Restaurant Industry In The U.S.
  • How Does McDonald's Intend To Turn Around Its Chinese Business?
  • Why Has McDonald's Stock Price Risen 20% Over The Last One Year?
  • Why Is McDonald's Concentrating On Refranchising?
  • Is McDonald's Dependence On High Growth Markets Increasing?
  • McDonald's Versus Burger King: Whose Franchisees Perform Better?
  • McDonald's Slows Down In Q2'16, Despite Growth In Comparable Store Sales
  • McDonald's Q2 FY 2016 Earnings Preview: Investment In Quality, All Day Breakfast To Drive Revenues
  • McDonald's 2016 Revenues To Decline YoY Despite Improvement; To Pick Up Pace Thereafter
  • What's McDonald's Fundamental Value Based On Expected 2016 Results? (Updated After Q1 2016)
  • By What Percentage Have McDonald's Revenues And EBITDA Grown Over The Last Five Years?
  • What Is McDonald's Revenue & EBITDA Breakdown? (Updated After Q1 2016)
  • How Has McDonald's Revenue And EBITDA Composition Changed Over 2011-2015?
  • McDonald's Q1 FY 2016 Earnings Preview: All Day Breakfast To Drive Comp Sales In The US
  • Where Will McDonald's Revenue And EBITDA Growth Come From Over The Next Three Years? (Updated After Q1 2016)


1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for McDonald's

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This article appears in: Investing , Stocks , US Markets , Investing Ideas
Referenced Symbols: MCD , CMG , SBUX , QSR , DNKN

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