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It has been a little over a week since McDonald's (NYSE: MCD ) announced strong Q3 2018 earnings. Investors liked the news, sending MCD stock more than 7% higher in the days since.
Trading at or near a 52-week high when the markets as a whole have had a disastrous October is a testament to the company's business model and management team.
Consider McDonald's stock's same-store sales versus other fast-food options.
Same-Store Sales Growth
YUM Brands (NYSE: YUM )
Restaurant Brands International (NYSE: QSR )
Wendy's (NASDAQ: WEN )
Jack in the Box (NASDAQ: JACK )
A few notes about the above numbers before we get into the heart of the discussion.
Wendy's and Jack in the Box's same-store sales are from a July quarter. McDonald's and the other two are September quarters. Secondly, Restaurant Brands' 1% number is the same-store sales of Burger King, its largest unit by system-wide sales. Factor in the performance of Tim Hortons and Popeyes and you get even lower growth.
A Flight to Safety for McDonald's Stock
The incredible thing about the McDonald's numbers is that its supposed weak link - its U.S. locations - had same-store sales growth of 2.4% in the quarter, higher than all four of its peers listed above.
In the U.S., the company is going through a refranchising program as it moves to an asset-light business model where 95% of its locations will be owned by franchisees rather than the company.
It's the most significant construction undertaking in the company's history. In the short-term, it's hurting the top and bottom lines. However, long-term, it should revitalize same-store sales and system-wide revenues. Overseas, where it has implemented its restaurant updates and digital initiatives, same-store sales in the UK, Australia and France - three of its biggest markets - were up 5.4% in Q3, 130 basis points higher than analyst expectations.
" We are seeing encouraging response from customers in restaurants where many of these improvements are already completed," stated CEO Steve Easterbrook. "This is in line with our experience in other McDonald's markets such as Canada, the U.K., and Italy that executed programs several years ago that were similar to the one the U.S. is undertaking now."
I like the fact the company is implementing these changes in its U.S. stores at a time when the economy is sound and consumers are spending.
Sure, some franchisees are upset they're not getting enough support from the company, but this is a massive undertaking. It's renovating 1,000 stores per quarter and expects to have renovated more than 12,000 by the end of next year.
"In our opinion, the changes McDonald's is making are right and will pay dividends over time," said Neil Saunders, managing director of GlobalData Retail. "Indeed, a failure to change would be disastrous."
To ensure that restaurant sales at renovated locations grow at an accelerated rate upon reopening, McDonald's stock has put into place a plan involving local communities to get people out to its stores. That should help rebuild lost traffic and grow revenues.
Change in any business is essential for growth. McDonald's franchisees in the U.S. will get through this dip in the road, putting them further ahead in the end.
The Bottom Line on MCD
In early January, I predicted that MCD stock would hit $200 in 2018. With two months left in the year, it's not looking good. However, it's looking a heck of a lot better than it did in March, when its stock was trading around $147.
I like the changes it's making. It's still very profitable despite the construction, it has got a good balance sheet, and its 2.6% dividend yield is desirable. And heck, it could be worse, you could be a shareholder of one of its peers, who aren't doing nearly as well.
If you're long MCD stock, I'd stay long.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
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