No one thought second-quarter earnings would be good at McDonald's (NYSE: MCD), and the fast-food giant showed why the pessimism was warranted as sales and profits plunged below even Wall Street's dour expectations.
Yet the burger chain also showed why it is a mistake to be too gloomy over its performance. McDonald's drive-thru window shone this quarter and will lead the restaurant to recovery.
A global slump
Make no mistake, the results were ugly: Currency-adjusted revenue plunged 29% year over year and comparable-restaurant sales collapsed beyond analyst forecasts. U.S. comps dropped 19% versus expectations of just an 8% decline, and global comps plummeted 24% compared to an expected 20% decline.
Earnings offered no solace, either, as profits tumbled 66% to $0.65 per share versus forecasts of $0.74 per share.
So it was a dismal quarter no matter how you looked at it, except that McDonald's drive-thru performed admirably and kept the business going where it could. It should give investors hope that the fast-food chain can get back on the fast track to growth.
What's driving sales higher
McDonald's has been ahead of the curve in what it calls the Three Ds (drive-thru, delivery, and digital), and they will all come together in a more unified and cohesive strategic plan that will be unveiled later this year.
In the meantime, the drive-thru business carried the full load of McDonald's business in the second quarter, accounting for an incredible 90% of the restaurant's sales. Delivery and digital orders also saw an uptick, but customers who went to the burger joint were using its drive-thru lanes.
Other restaurants are seeing the value drive-thru windows bring to their business during the pandemic. Chipotle Mexican Grill (NYSE: CMG) had begun adding its Chipotlane windows well before the pandemic, and is now focusing on adding more. It recently opened its 100th restaurant with a drive-thru window and said over 60% of the restaurants it opens this year will have a Chipotlane, while 70% will have them next year.
Similarly, Shake Shack (NYSE: SHAK) views drive-thru windows as an essential part of its business now and said it will begin punching holes in the walls of its restaurants that can accommodate one.
Rise and shine
Drive-thru windows are not miracle workers, though, and analysts had expected McDonald's second-quarter report to be much better than it was because the lanes were such prominent components of its business before the COVID-19 outbreak.
The drive-thru windows typically account for 70% of McDonald's revenue, but what might have been missing from the analysis is the breakfast daypart, which represented 25% of sales and 40% of profits. Back in January, CEO Chris Kempczinski told analysts, "We have to win at breakfast."
So with the pandemic closing down all but essential businesses, drivers were off the road, eliminating the need to stop at McDonald's in the morning to grab breakfast or a cup of coffee. It was key to why I thought the burger joint's business would get much worse before it got better.
But now with businesses reopening, contactless food ordering will remain essential to a restaurant's performance, which means although Wall Street might have been early in predicting McDonald's recovery, analysts see where it is going. Investors should take note as well.
Ready to serve
McDonald's had also been hampered by international restaurants being completely closed in many of its most important foreign markets, regardless of whether they offered delivery or drive-thru.
Now they're reopening, and even here in the U.S., where 99% of McDonald's restaurants remained operational during the pandemic, the rest of the economy will have to come out of the restrictions imposed on it for the fast-food leader to recover.
That should begin to happen now, and with customers still leery about dining out (and McDonald's delaying the reopening of its dining areas anyway), the third quarter and beyond should start showing the rebound Wall Street and investors have been expecting.
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