McDonald Corporation’s (MCD) third-quarter earnings were driven by strong sales growth through menu innovation amidst the increase of COVID-19 cases, and the company smashed analyst expectations for both revenue and earnings. McDonald’s Corporation is the restaurant operator with the largest footprint in the world with $93 billion systemwide sales across 39,000 stores in 199 countries in 2020. The firm earns 57% of its revenue from franchise royalties and lease payments and the remainder from company operations spread across every continent of the world. Its operations are subdivided into three core segments: the United States, internationally operated markets, and the International Developmental Licensed Markets segment. McDonald’s has managed to maintain its quality standards and consistency across its outlets thanks to its ownership of 55% of the real estate and 80% of the buildings in its franchise system.
Earnings Trending in the Right Direction
Robust drive-thru presence, investments in delivery, and digitalization efforts over the past few years have been the driving forces behind the company’s success amid the pandemic. The revenue for the third quarter came in at $6.2 billion against Wall Street estimates for $6.03 billion in revenue, and considerably higher than the revenue of $5.4 billion reported a year earlier. The adjusted EPS was $2.76 (excluding special items) for the quarter versus $2.46 expected by analysts.
U.S same-store sales were up 9.6% aided by higher menu prices and new loyalty programs, and global same-store sales grew 12.7% with strong sales in the UK, where extended pandemic lockdowns were eased recently. The company reported positive comparable sales in Canada, France, and Germany as well, adding to its success in other key markets. Australia experienced weakened sales due to ongoing restrictions, but the situation is likely to reverse in the next quarter as mobility restrictions have come to an end ahead of the holiday season.
Company-operated restaurant sales were up 14% year-over-year along with franchise-operated restaurants revenue which rose 15% year-over-year. McDonald’s is one of the most popular stocks among dividend investors because of the company’s strong track record of shareholder wealth distributions, and staying true to this characteristic, the company announced a 7% increase in its quarterly cash dividend to $1.38 per share and confirmed the resumption of its share repurchase program as well.
The Outlook for McDonald’s Is Improving
Menu innovations of Mcdonald’s have been instrumental in keeping consumers excited about its products, and this is a strategy followed by many of its closest rivals as well. Popeyes exploded the space with its chicken sandwich while Chipotle is experimenting with its own brisket. For McDonald’s, partnering with beyond meat for McPlant to be rolled out to all McDonald’s stores in the U.S. is quite a different move for once a meat-dependent fast-food company. This is initially done as a small operation test in selected locations in the U.S starting from November 3 and the company is trying these products in the United Kingdom and Ireland as well. McDonald’s is still not sure whether to make the Mcplant a full offering or a limited-time offering, but in any case, the company seems to be moving in the right direction by catering to the latest consumer spending habits.
McDonald’s currently has around 80% of its dining rooms open and most of the remaining locations are offering drive-through ordering facilities and delivery. Although the company did face some challenges at the height of the pandemic last year, McDonald’s seems to be out of the woods, and it would be reasonable to expect a strong financial performance in 2022 once mobility restrictions are completely removed.
In September, McDonald’s announced a plan to make every toy around the world more sustainable by 2025. Makeover of its iconic happy meal toys is also a part of McDonald’s recent inventions which could add value for the company in the market as ESG-oriented investors are likely to get behind the company. In the UK and Ireland, Happy Meal toys are in the process of transitioning into more sustainable materials, while in France it is already done. The Fast-Food chain’s opportunity to bank on customer enthusiasm remains unaltered with the Happy Meal transition and demand for Happy Meals stays put amid these changes, which is a positive sign.
The Chicago burger giant’s new growth strategy including the three ‘D’s:’ digital, delivery, and drive-thru, has boosted sales during the pandemic. McDonald’s even experienced customer spending on larger orders amidst rising inflation. McDonald’s entered into a strategic partnership with IBM recently to develop Artificial Intelligence technology that will help the fast-food chain automate its drive-thru lanes. CEO Chris Kempczinski views IBM as the ideal partner for McDonald’s given its expertise in building AI-powered customer care solutions and voice recognition.
Takeaway
Rising labor costs and commodity prices are the two main risks that need to be monitored by investors, but these challenges are highly unlikely to alter our view of McDonald’s as one of the best income stocks in the market today. What sets McDonald’s apart from other dividend stocks is the company’s ability to continue to grow, and we remain optimistic about what 2022 holds for the company as the fast-food giant embraces digital solutions to improve customer experience.
