INVESTMENT THESIS
We expect McDonald’s, with its strong digital, delivery and drive-thru businesses, to endure a period of weak industry sales better than most other restaurant chains. During the current period of industry weakness, we prefer large restaurant chains like McDonald’s that offer value menus, spend heavily on advertising, and have clean balance sheets.
RECENT DEVELOPMENTS
On November 9, McDonald’s posted 3Q20 adjusted earnings of $2.22 per share. Third-quarter revenue of $5.4 billion fell 2% from the prior year and matched management’s preannouncement. Revenue was $40 million above consensus.
Overall same-store sales fell 2.2%, also in line with management’s preannouncement on October 8. We were impressed that U.S. same-store sales turned positive in the third quarter and increased 4.6%. Same-store sales in the International Operated segment fell4.4% and 10.1% in International Developed Markets. The operating margin increased to 46.6% in 3Q20 from 43.8% in 3Q19 and was above the consensus estimate of 40.8%.
Importantly, management said that the coronavirus would have a ‘fairly small’ impact on its business.
In November 2018, at its Canada Analyst Day in Toronto, management highlighted efforts to remodel its Canadian restaurants, and noted that remodeled locations had seen revenue gains of 4%-6%. The renovations include restaurants that were last remodeled in 2010. MCD also said that it had doubled its share of the Canadian breakfast market over the past decade, and tripled its share of the Canadian coffee market.
Management also said that it was encouraging loyalty-program customers to place more orders digitally and highlighted its success with kiosks. Since the start of the kiosk program in 2016, kiosks have been placed in 25% of stores, up from 11%-12% in 2017. MCD said that kiosk installations have resulted in additional sales without requiring significant additional labor. The company is also offering delivery at about 700 restaurants. The average delivery order is about twice as large as the typical order, adding to restaurant revenue.
EARNINGS & GROWTH ANALYSIS
MCD has adjusted to an evolving consumer environment. While drive-throughs have provided about 70% of revenue for decades, simplified menus have enabled MCD to increase the number of orders it can process during the pandemic. Moreover, the company has invested in deliveries and mobile and ordering payment systems in recent years.
VALUATION
On November 13, BUY-rated MCD closed at $213.28, up $0.21.
Source: Argus
