McDonald's (MCD) Strategic Efforts Bode Well, Margin Woes Linger

McDonald's Corporation 's MCD impressive earnings surprise history, multiple sales and digital initiatives as well as positive comparable sales have helped the stock to outperform its industry in the past two years. While the stock has gained 38.6%, the industry's rallied 12%. However, in the past six months, the company struggled due to margin pressure and continuous decline in top line over the past few quarters. Let's delve deeper.

Factors Driving Growth

McDonald's delivered better-than-expected earnings for the 16th straight quarter, when it posted second-quarter 2018 results. In the trailing four quarters, the bottom line surpassed the Zacks Consensus Estimate by an average of 4.7%. A robust operating performance drove McDonald's earnings in the period.

The company's sales boosting initiatives are also driving global comparable sales (comps). In second-quarter 2018, comps grew 4%, marking its 11th straight quarter of positive comps. Moreover, U.S comps were up 2.6% in the same period. In order to drive comps in the United States, representing about 40% of the company's business, McDonald's intends to improve its focus on increasing guest traffic.

Further, the Zacks Rank #3 (Hold) company's strategic efforts in the International Lead segment and High Growth markets continue to drive comps higher. In second-quarter 2018, the International Lead segment and High Growth markets witnessed comps growth of 4.9% and 2.4%, respectively.

Comps growth in international markets was driven by robust sales and guest count growth in the UK, Canada and France. Double-digit sales increase in Italy and Poland drove the metric in the High Growth markets. These apart, McDonald's is consistently trying to improve its performance in the International Lead Markets, including Australia, Canada, France, Germany and the UK.

In an effort to boost growth, McDonald's plans to invest $2.4 billion in 2018, mostly toward accelerating deployment of its Experience of the Future in the United States that focuses on adding technology to its eateries. In the first and second quarter of 2018, the company completed more than 1,300 Experience of the Future' restaurants (EOTF). Currently, it has more than 5,000 EOTF restaurants.


McDonald's revenues have been weighing on the company's performance for quite some time. In the second quarter of 2018, the company's revenues declined 12% year over year, following a 9% fall in the preceding quarter. Further, the top line had declined 11.4%, 13%, 7% and 4.7% in the fourth, third, second and the first quarter of 2017, respectively.

This downturn reflects the impact of the company's strategic refranchising initiatives. During the reported quarter, the company-operated restaurants' revenues plunged 27% year over year to $2,594.9 million. However, the same at franchise-operated restaurants improved 11% to $2,759 million.

Moreover, decline in margin continues to be a major concern over the past few quarters. Increased commodity costs may further put pressure on the margins. In the second quarter, consolidated margins contracted 80 bps to 16% due to continued labor as well as commodity pressures across major markets.

Key Picks

Some better-ranked stocks in the same space are BJ's Restaurants, Inc. BJRI , Dine Brands Global, Inc. DIN and Darden Restaurants, Inc. DRI . While BJ's Restaurants sports a Zacks Rank #1 (Strong Buy), Dine Brands and Darden carry a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

BJ's Restaurants has an impressive long-term earnings growth rate of 15.3%.

Dine Brands Global reported better-than-expected earnings in the trailing four quarters, with an average beat of 8.1%.

Darden reported better-than-expected earnings in the preceding four quarters.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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