Refranchising Efforts to Hurt McDonald's (MCD) Q4 Revenues

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McDonald's CorporationMCD is set to report fourth-quarter 2018 financial numbers on Jan 30, before the opening bell.

The company's efforts to strengthen the position through various sales-building initiatives, along with increased focus on franchising, are likely to have driven earnings in the fourth quarter of 2018. McDonald's delivered better-than-expected earnings for the 17th straight quarter when it posted third-quarter 2018 results. The upside trend is likely to have continued in the fourth quarter as well. Moreover, the company's earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, the average being 6.1%.

Backed by such impressive earnings trend, shares of McDonald's have gained 16% in the past six months, outperforming the industry 's 13.6% growth.

However, when we focus on the company's overall top line, we expect a downward trend to persist. This is because; the company's refranchising initiatives are likely to have hurt revenues, even though it may have bolstered earnings. (Read More: Refranchising Efforts to Aid McDonald's Q4 Earnings )

Top-Line Slump to Persist

McDonald's declining revenues have been weighing on the company's overall performance for quite some time. Its refranchising initiatives have been responsible for the persisting downward trend.

In the third quarter of 2018, the company's revenues declined 7% year over year, following 12% and 9% fall in the second and first quarters of 2018, respectively. Overall, revenues declined 9% year over year in the first nine months of 2018. This trend is likely to have continued in the fourth quarter as well. Subsequently, the Zacks Consensus Estimate pegs net revenues at $5.2 billion for the to-be-reported quarter, reflecting 3.4% fall from the prior-year quarter.

During the las t report ed quarter, company-operated restaurants' revenues declined 18% year over year to $2,511 million. However, the same at franchise-operated restaurants improved 6% to $2,858.4 million. The Zacks Consensus Estimate for company-operated restaurants' revenues in the fourth quarter marks a 10.5% year-over-year decline while franchise revenues are likely to increase 4.8% from the year-ago quarter.

Comps Trend Encourages

McDonald's sales-boosting initiatives are driving global comparable sales (comps). In third-quarter 2018, comps grew 4.2%, marking the 13th straight quarter of positive comps. Moreover, U.S comps were up 2.4% in the period. In order to drive comps in the United States, representing about 40% of the company's business, McDonald's aims at improving its focus on growing guest traffic. In this regard, the company is accentuating on operational excellence, product innovation, and limited-time offerings.

We believe that rigorous sales-building efforts may have driven fourth-quarter comps as well, even though the overall decline in company-operated restaurants' revenues may have more than offset comps growth.

Zacks Rank & Stocks to Consider

McDonald's currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the industry are Darden DRI , Starbucks SBUX and El Pollo Loco LOCO , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Darden, Starbucks and El Pollo Loco's earnings for 2019 are expected to grow 18.3%, 11.6% and 14.3%, respectively.

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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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