McDonald’s Dips on Refranchising
McDonald’s refranchising efforts dragged the brand’s second quarter revenue results down, as the brand’s main metrics pointed to continued strength as the company continues long-term investments in digital technology, store remodels and on-demand delivery.
Looking at the marquee bullet points, global sales at McDonald’s increased 4 percent, reflecting positive comp sales in all segments. Revenues decreased 12 percent, down to $6.05 billion from $5.35 billion a year earlier, as the brand continues to shed company-owned stores, and systemwide sales increased 5 percent. Its diluted earnings per share of $1.90 grew by 12 percent, with $2.5 billion returned to shareholders through repurchases and dividends.
“We're seeing good performance across our business as our customers tell us that they value and appreciate the moves we’re making to elevate the McDonald's experience,” said McDonald's President and CEO Steve Easterbrook. “We're pleased with the results of our international business and the progress we're making in the U.S. on executing on our Velocity Growth Plan priorities. We’ve now marked 12 consecutive quarters of positive comparable sales, and we are confident that we're executing the right strategy to achieve long-term, profitable growth.”
Research firm Cowen lowered its share price target for MCD slightly, down $5 to $190 (from a current $158-and-change), with the firm’s Andrew Charles offering an underwhelmed take on the franchise leader’s latest results.
“While 2Q U.S. comps were in-line, the reduced level of market share gains vs. quick service peers left more to be desired,” Charles wrote in his report on the company’s latest financial results. “We appreciate the greater breadth of value tactics to be implemented starting in August as the fastest way to reignite traffic, which should sustain through 4Q given an easing commodity backdrop.”
Analyzing the company’s future strategy and current investments, Cowen’s Charles said McDonald’s will work to diversify its value efforts with regional promotions that, to his eye, suggest the company’s $1-2-3 Dollar Menu hasn't delivered the anticipated results.
The so-called value wars continue in the QSR segment, and in its latest salvo Cowen said McDonald’s will soon launch a 2 for $5 sandwich promotion that’s reminiscent of its previous McPick 2 for 5 and corresponds to similar offerings from Burger King and Hardee’s, among others.
Charles said its value promotions are “successful in leading consumers to connect the dots and purchase side items and a beverage to help build margins,” he said. “Further, we like that MCD is taking a localized approach to reigniting breakfast sales by presumably focusing on $1 coffee in areas where coffee competitors dominate, and breakfast food deals in other regions.”
As somebody who tends to only get excited about McDonald’s when craving an Egg McMuffin, working to further expand breakfast sales sounds logical. Coffee brands continue expanding like crazy and other QSR players keep telling me they’re looking to further increase their own breakfast sales—so expect the breakfast battles to heat up as this historically hot summer (finally/mercifully) cools down.