McDonald's Corporation (MCD) on Q2 2021 Results - Earnings Call Transcript

Operator: Hello, and welcome to McDonald's Second Quarter 2021 Investor Conference Call. At the request of McDonald's Corporation, the conference is being recorded. Following today's presentation, there will be a question-and-answer session for investors. I would now like to turn the call over to Mr. Mike Cieplak, Investor Relations Officer for McDonald's Corporation. Mr. Cieplak, you may begin. Mike Cieplak: Good morning, everyone, and thank you for joining us. With me on the call today are President and Chief Executive Officer, Chris Kempczinski; and Chief Financial Officer, Kevin Ozan. Chris Kempczinski: Thanks, Mike, and good morning. At the heart of McDonald's is the experience we offer. And for 65-years, we've created iconic experiences for billions of people around the world. Along the way, we've always focused on following our customers’ needs, finding those convenient and engaging ways for them to enjoy McDonald's. At our founding, the restaurant experience was relatively simple. Customers would walk up to the front counter, place their orders and get hot, delicious, fresh food served to them quickly. In the early 1970s, McDonald's pioneered the drive-through as a new service channel for customers. And in the last few years, we've added even more service channels with delivery, curbside pickup kiosks, and table service. At the heart of each of these innovations was our global mobile app, which has evolved our customer experience from the physical world to the digital world. As this evolution continues, our digital offerings will become even more important to serving, interacting with and delighting our customers around the world, and the insights generated from these platforms will help us further improve their experience. Our marketing power and scale will continue to be critical throughout this journey, turning the various customer touchpoints into a holistic and compelling brand experience. But our aspirations are even higher. And to reach these goals, we need to create a more frictionless customer experience across all our service channels. Our customers should be able to move seamlessly between the in-store, takeaway and delivery service channels so that we offer even more convenience and better personalization. That's why we were excited to announce earlier this week, the creation of a team that has oversight for the end-to-end customer experience, under the leadership of our first Chief Customer Officer in McDonald's history, Manu Steijaert, Manu will oversee everything from the physical restaurants that we design and build, to the digital experiences that we embed along each step of the customer journey. Kevin Ozan: Thanks, Chris. I'm pleased to share that global comp sales were up 40% in the second quarter, or 7% on a two year basis. Our performance has continued demonstration of the broad base strength and resiliency of our business. We've surpassed 2019 sales levels for the second consecutive quarter, and now at an accelerated rate. Turning to the segment performance for the quarter, we grew comp sales across all segments versus 2019 levels, as business recovery progresses at varying degrees around the world. In the U.S., our momentum continued with Q2 comp sales up 26% or 15% on a two year basis, our strongest quarterly two year growth in over 15-years. And we saw double digit positive comps across all day parts on a two year basis. While at the same time, franchisees continue to achieve record high operating cash flow. Our performance in the U.S. is the result of an accumulation of decisions that we've made over the last 18-months. This includes bold marketing initiatives, investing in the core menu and strengthening our digital offerings, with an underlying focus on running great restaurants. As customers in the U.S. began to venture out more during the second quarter, we continued to see strong average check growth, driven by larger order sizes, and menu price increases. That's been bolstered by growth in delivery and digital platforms, as well as robust menu and marketing programs. This includes an advertising rehit of our crispy chicken sandwich, which continues to perform at an elevated level, and the success of our BTS meal. Both initiatives attracted customers and drove incremental sales in the quarter. In our international operated market segment, which has been historically strong, recovery is taking hold. Comp sales were up 75% in the quarter, or nearly 3% on a two year basis, as we left the peak in 2020 restaurant closures. Remember, in some cases full country operations were shut down in Q2 last year due to the pandemic. Chris Kempczinski: Thanks, Kevin. As we look ahead to the rest of 2021, we're finding ways to capitalize on our strengths. As we've seen the growth pillars of accelerating the arches are deeply interconnected, reinforcing and bolstering one another. It is at the intersection of our MCD that we continue to deepen our connection with customers, and create a consistent and enjoyable experience, proving that the whole is greater than the sum of its parts. Which brings us back to our famous orders platform, when it launched in the U.S. last year, our goal was to create an ambitious marketing campaign, one that would leverage our customers favorite core menu items, speak to a new generation in authentic ways, and increase digital engagement without adding any restaurant complexity, all while positioning us for the longer-term. The famous orders platform was based on a simple idea, but unites all our customers including famous celebrities is everyone has their go to McDonald's order. To Travis Scott, then J Balvin famous orders broke records in the U.S. This quarter, the BTS famous order took that ambition global, connecting our marketing, core menu and digital strategies in 50 markets. And it was our first famous order with custom packaging and app exclusive content. It has been to borrow a BTS lyric dynamite. We saw significant lifts in McNuggets sales and record breaking levels of social engagement. McDonald's customers and BTS fans all over the globe downloaded our app, ordered chicken McNuggets with delicious sweet chili and cajun dipping sauces, and posted about it on social media, leading McDonald's to trend number two on Twitter globally, and number one in the U.S. And then the BTS army took it a step further and memorialized the partnership, creating shoes, accessories and frame memorabilia from our packaging. They were so appreciative of the meal that the BTS army went out of their way to prepare snacks for our crew and managers in Malaysia, the Philippines and Vietnam to support them on launch day. The famous order platform is the M, C and D in action. Both famous orders and My McDonald's rewards are also reminders of the unrivaled convening power of McDonald's. And this is just the beginning of the digital customer journey at McDonald's. As we create more personal and seamless McDonald's experiences and make it easier for our crew to connect with our customers, we're giving customers multiple reasons to continue to come back to McDonald's. By using digital, we will also leverage our advantages in value and convenience, day part and menu breath and our biggest advantage our size and scale. Now, for more on the financial performance in Q2, I'll pass it back to Kevin. Kevin Ozan: Thanks, Chris. Adjusted earnings per share in Q2 was $2.37, which excludes a gain on the further sale of some of our ownership in McDonald's Japan, and a one-time income tax benefit in the UK. In year-to-date adjusted operating margin was 43%, reflecting improved sales performance across all segments, and higher other operating income compared to last year. Total restaurant margin dollars grew $1.3 billion in constant currencies, with improvement in both franchised and company operated restaurant margins, mostly driven by higher comp sales as a result of COVID-19 impact last year. Company operated margins in the U.S. were strong, as we continue to see top-line growth driven by higher average check. In the IOM segment, company operating margins improved significantly in Q2, as sales have recovered to pre-pandemic levels. G&A decreased 1% in constant currencies for the quarter, primarily due to lapping our $160 million incremental marketing investment last year, offset by higher incentive-based compensation, and increased spend in restaurant technology. Our adjusted effective tax rate was 21.7% for the quarter, and we're projecting the tax rate for the back-half of 2021 in the range of 21% to 23%. And finally, foreign currency translation benefited Q2 results by $0.13 per share. Based on current exchange rates, we expect FX to benefit EPS by about $0.03 to $0.05 for Q3, with an estimated full year tailwind of $0.20 to $0.22. As usual, this is directional guidance only as rates will likely change as we move through the year. Now, I'll turn it back to Chris. Chris Kempczinski: Thanks, Kevin. I'm proud of all that we've accomplished during the past 18-months. It's a remarkable testament to the resiliency of the McDonald's system. But as we turn our focus to the incredible opportunities that lie ahead of us, it's also reminded us of where we must go. For 65-years, the one unassailable truth about McDonald's is that we get better together. There's a reason why it's one of our core values, continually finding ways to better ourselves, and our system is how we keep our business relevant, not just for this generation, but the next. How do we get better together today? We get better together by focusing on our people. In this highly competitive market for talent, successful employee recruitment and retention is fundamental to drive growth. That's why in May, we announced a 10% increase in the average hourly wage at our company-owned restaurants in the U.S., with the goal to get to a $15 an hour wage by 2024. We get better together through diversity, equity and inclusion. Today, 23% of our U.S.-based suppliers come from diverse backgrounds, more than double the industry average. We have set a goal to increase purchases of goods and services from diverse owned suppliers by 10% over the next four years. That will put us in a position where a quarter of our U.S. spend is with diverse own suppliers by 2025. And we've committed to doubling our national advertising spend with diverse owned media here in the United States, between 2021 and 2024. We get better together by serving our customers, but also serving a larger purpose in communities across the world. As part of our ongoing efforts to support communities through the pandemic, we recently partnered with the Biden Administration to make access to information on vaccines easier for the millions of customers who enjoy McDonald's in the U.S. Our part in the national We Can Do This campaign continues this month with McDonald's hot McCafé cups, McDelivery seal stickers, both of which lead customers to vaccines.gov. In Canada, we're doing something similar around This Is Our Shot, the national campaign through which McDonald's will supply information in restaurant and drive-through orders, while supporting a digital campaign to replace vaccine hesitancy with confidence. Finally, we get better together through our commitment to our planet. In May of 2014, we were one of the first major corporations of our size to publicly commit to a sustainability framework. We promised that we would report on our progress against our 2020 sustainability goals by the fall of this year. As we prepare to release our impact report, I've never been prouder of the difference we're making in the world. We're working closely with partners across the globe today to source food locally and responsibly, to expand our use of sustainable packaging, and to power our restaurants with renewable energy sources. It's the ultimate example of our three legged stool in action, where owner operators, suppliers and employees each play a critical role in our efforts to protect the planet. We're working every day to set ambitious goals and to hold ourselves accountable, to be known not just for what we do as a company, but how we do it. It's part of our broader commitment to transparency and to following clear science-based guidelines from the experts. We know we still have much work to do. But our internal strategy and the external landscape are converging to create a moment unlike any other. We are aware of our unique role in the world. We are inspired by all the opportunities that lie ahead. Over the back-half of this year, I'm looking forward to getting back into the restaurants around the world and spending more face time with our people. I'm amazed with everything that our system has accomplished over the past 18-months, and we can't wait to write the next great chapter of the McDonald's story together. With that, we will begin Q&A. Operator: Thank you. A – Mike Cieplak: Our first question is from Andrew Charles with Cowen. Andrew Charles: Thank you. Chris, you talked about delivering a more frictionless experience and just given the pledge to engage guests in new ways and in the backdrop of the challenging industry staffing situation in U.S., is this prompting you to accelerate implementation of Apprente AI voice ordering at the drive-through? I was hoping you can provide an update on your ambitions for a lot of the drive-through technology over both the near and medium-term. Thanks. Chris Kempczinski: Thanks, Andrew. When we announced earlier this week, the creation of the Chief Customer Officer job it was with the idea that as we are introducing more service channels, we have an opportunity to design it in such a way that it feels like these things all happen at the same time, as opposed to in reality how they happened, which was kind of one came after the other. So Manu’s chatter is about making this so that the customer feels that this is a completely seamless experience in the restaurant. I think as the point that you're raising about Apprente is related to it, but it's not central to it. I think we announced maybe it was about a month or two ago that we were seeing good progress with Apprente. It's in 10 restaurants. But that is going to be a significant effort that takes us a number of years before we're able to deploy that in the U.S. So I wouldn't read or interpret anything around Manu’s announcement as related to accelerating Apprente, there's still a lot of heavy lifting, associated with getting Apprente ready for deployment across the U.S. and eventually the globe. A – Mike Cieplak: Our next question is from Eric Gonzalez with KeyBanc. Eric Gonzalez: Hey, thanks, and good morning. I have questions on labor, I was just wondering if you can comment on staffing levels now versus maybe earlier in the quarter, whether you've seen a material improvement across the system, particularly in some of those states that have ended the government benefits early? And then maybe if you can comment some of the strategies the franchisees have used to successfully attract talent? And how the recent labor shortage might have impacted drive-through speed and whether that's become a drag on sales? Thanks. Chris Kempczinski: Thanks, Eric. It's certainly still a challenging staffing environment, not just in the U.S., we're also seeing in Europe, where staffing is challenging in part because of some of the limitations of movement of people across borders. But if you focus on the U.S., while it is a challenge, it's getting better. I don't want to declare by any means that it's easy, but we're certainly seeing some improvement. We're seeing applications have increased pretty significantly, applications in states that have ended early the Federal stimulus, those have tended to do even better. So I do think that there's evidence that as the Federal stimulus rolls off, that you'll see an improvement in the application rate. And I think you're seeing wages go up as well. I mean, we made our announcement. I think broadly, we're seeing wages going up about 5% or so in our U.S. restaurants. And that is also helping improve the situation. I would just point out for us, in our McOpCo restaurants after we made our announcement back in April, we're getting close to full staffing levels or what we would deem to be kind of our full staffing levels in our McOpCo restaurant. So it is possible, the situation is improving. I think the tools and some of the ideas that you're seeing our franchisees out there deploying, whether its things like free childcare, sign on bonuses, et cetera that's the power of the McDonald's system at work and the power of our sort of local franchisees, innovating and coming up with ways to ensure that they can staff the restaurants. In the short-term right now, there has been a negative impact on staffing and service times. As you may remember, we've improved service times over the last few years by about 30 seconds. More recently, we've seen service times decrease about three seconds, so we don't love that. But a big part of it is certainly associated with the staffing challenges in the restaurant, but also the demand that we're seeing in the restaurant. So, I'm constructive and positive on the staffing outlook. In the back-half, I think we're going to continue to make progress, but it certainly is a challenge. A – Mike Cieplak: Next question is from Dennis Geiger with UBS. Dennis Geiger: Great. Thanks for the question. Chris, you've got strong momentum in the U.S. and what sounds like a solid strategy and plan to enable continued growth over both the near and the longer-term. But it's more difficult comparison approach, how are you thinking about maintaining that underlying momentum going forward? And maybe if you could kind of help us frame up sort of existing and perhaps emerging drivers that help you to support further gains over the coming quarters in the U.S.? Thanks. Chris Kempczinski: Sure. So I think the strategy that we've laid out accelerating the arches strategy had three growth pillars that for us, we're going to be multi-year drivers of this. It was going to be the M, which was marketing, the C, which was core menu, and the three Ds of digital delivery and drive-through. So I don't think you're going to see a deviation from those three pillars as being what drives sort of the next layers of growth. I do expect, what you will see is that we will see us continuing to find ways within those to move the business forward. So starting with the M, famous orders has been a nice idea for us. My challenge to our marketing team here at McDonald's is what's the next great idea. And we think there's certainly more we can do with famous orders. But we've got to keep coming up with new ideas from a marketing standpoint. So I think that's got to be something that's on us to deliver. With core menu, we are rolling out in a number of markets, we've been rolling out a new way to cook are 10 to one patties, that is delivering hotter and fresher burgers. We're seeing nice lifts in Canada and Australia, when we've done that. We call it rapid turnover. We're going to deploy that to the rest of the market as well. I think that's another thing for us. And we're seeing in chicken, certainly we've had a lot of success with the chicken sandwich in the U.S. so far. McSpicy, as I referenced in my opening remarks, that's something that we're taking out, so moving there. And then lastly, we're in the early, early stages on digital. And I'm incredibly encouraged by what I'm seeing so far with the loyalty rollout. We're seeing very good customer adoption for us to be at 12 million loyalty users, before we've even turned on the advertising is I think, a great start there and just a testament to customers sort of pent-up demand for this type of offering for us. So, there's not any one thing that I would point to. The strategy is still very much intact, and we're going to execute, and you're just going to see us continue to come out with ideas within that that are going to continue the momentum. Kevin, I don't know if you want to give any kind of outlook about sort of how we think about Q3 and beyond. Kevin Ozan: Well, just as we think about Q3, I guess both for U.S. and IOM, U.S. as we've talked about, obviously, we had a great two year trend in the second quarter. As we look a little bit ahead to the third quarter, I think we would see it moderating a little bit in the U.S. on a two year basis, but still being double digit and certainly very strong. The IOM segment on the other hand will continue accelerating its momentum. Several of the markets, as we mentioned, just opened and reopened in May and June. And so we anticipate strong momentum continuing in the IOM for the rest of the year. A – Mike Cieplak: Our next question is from David Tarantino with Baird. David Tarantino: Hi, good morning. I have a follow-up to that last comment about IOM. I guess, on the last call you had expected IOM to your comps to stay negative in the second quarter. And obviously, you did much better than that. So, I wanted to ask kind of what surprised you to the upside? And then secondarily, do you think as these markets reopen, that you're picking up outsize share relative to your key competitors? Chris Kempczinski: Yeah. Thanks, David. So yeah, in the first quarter, I think I said that we expected not to get back to flat yet for the IOM on a two year basis. And obviously to your point, we did better than that. Certainly at the time, one of the things we're guessing or we're guessing is when each of the markets would reopen, based on regulations going on at the time with no end dates, or knowing exactly when they'd allow markets to reopen. So some of the markets were able to reopen a little bit earlier than we had originally anticipated, whether that's certain channels or all channels. And the other thing that we are seeing is that when we do reopen, business comes back quickly. And so, there's certainly a pent-up demand in some of those markets that had shutdowns again, primarily in Europe. And so, we are seeing when those markets reopen, there's significant demand that's waiting to come back, whether that's through the drive-through, whether that's in-store. And as you know, we have a higher percentage of in-restaurant or in-store business in Europe than we do in the U.S. So it was really important to get the dining rooms reopen throughout Europe. So that demand and reopening plans, I'd say have gone a little bit better than we were first anticipating in the first quarter. And now our expectation is, as long as we don't go backwards on lockdowns again, which obviously is a still a little bit of a risk, but assuming that none of the markets go back through lockdowns, we feel good about continuing the momentum that in all of those markets. A – Mike Cieplak: Our next question is from John Glass with Morgan Stanley. John Glass: Thanks very much. Chris and Kevin, at your investor event in December, you laid out some targets for G&A and CapEx and some of that was associated with some technology spending you would be doing some asset upgrades. Has your thoughts involved on how much you need to spend to achieve these goals? I'm thinking about technology, are you better off outsourcing some of this given how fast it moves versus in-sourcing, which has been a pressure on the G&A line? Just an updated thoughts on that, particularly as your digital journey has gone six months further, versus when you last talked about those targets? Chris Kempczinski: Yeah, I'll start off John, and then pass it to Kevin for any other thoughts. But I think if you go back to what we announced, and certainly we were anticipating in some of our guidance there, how we expected the business to evolve over kind of the next three years or so. And so, I think from a G&A standpoint, we're very much I think on track with G&A. I do think that there is probably a balance toward maybe getting a little bit more that we outsource versus in source on that. And it's about for us ultimately giving the best customer experience. So it's not for us driven by trying to hit a number per se, but it's about delivering the best customer experience. I think when you can pick best of breed suppliers from out there in the industry, our experience has been that that does tend to work a little bit better. We referenced previously, we do think we'll probably be on the higher end of capital spend from the guidance standpoint, just because of a unique growth opportunity out there. But I don't think you're going to see anything that's dramatically different from what we talked about last year. Kevin, I don't know if you have anything to add? Kevin Ozan: No, I would just reiterate that what we talked about for 2022, we obviously haven't done our kind of detailed planning yet for 2022. But the initial guidance we gave, both for G&A and capital, I think still is pretty much intact, which is kind of the G&A as a percent of sales and the total capital envelope of around $2.3 billion or so. So, none of that has changed really. And then, I think, as we talked about in the investor event, we would expect to get leverage, certainly on G&A as a percent of sales longer-term, because what we're seeing on the technology spend is, I don't think the actual spend levels will go down, but I don't expect it to go significantly up either. So as sales grow, certainly we should get more leverage as a percent of sales. But, I think the technology will require a significant amount of ongoing spend going forward, which is why we believe we've got an advantage just from the size and scale aspect. A – Mike Cieplak: Our next question is from Jeff Bernstein with Barclays. Jeff Bernstein: Great. Thank you very much. Just getting back to the inflationary environment topic, clearly the franchise model helps to insulate corporate. But just wondering how we think about your outlook for the system in terms of commodities and labor, global effects 12-plus months, as a system your size, I would think you'd be a pioneer have pretty good visibility. The pressures are outsized, which I would presume I'm just wondering how those conversations go with franchisees. And then you mentioned that the cash flow or profitability that peaks, but do you think the messages that you prefer to maybe take a hit to the margin to sustain the strong sales momentum? Or are there incremental cost savings? Or, do you consider incremental menu pricing, just wondering how you think about that, based on what your outlook is for commodities and labor over the next 12-plus months? Thank you. Chris Kempczinski: Sure. Well, in 2021, we're seeing pretty muted inflation, it's, call it 1% to 2%. Now, we're hedged in a lot of our categories there, so we're benefiting from that. It's probably a little too early for us to give an outlook to what 2022 looks like. We typically have that number that we start talking about with franchisees in October. And, we certainly hear and recognize some of the challenges that are out there from an inflation standpoint. But we also have, as you mentioned in your question, things to our advantage around our size and some of the relationships that we have with our suppliers that, we think that there are going to be ways that we can perhaps offset some of that. So, I think it's right now a little bit premature to say necessarily that we're going to be in a significant inflationary environment next year. I'm hopeful that we're going to be able to manage that to something that is a little bit more in line with kind of our historical range that we've seen on that. We are seeing challenges related to some of the supply chain issues. But it's on the equipment side, particularly, so it's equipment, getting equipment manufactured in Asia, getting that over into markets that maybe have bigger unit growth, aspirations. We're also seeing the chip shortage as something that's rippling through a little bit on the equipment side. So, we are closely monitoring what's happening with equipment, and just making sure that we've got the plans in place there, because that tends to be a longer lead item on things. From a pricing standpoint, I would lastly just say, the pricing that we've taken this year, roughly around 6% or so I think in the U.S., that is about in line, maybe a little bit ahead of where the overall inflation is when you add in the labor inflation with food inflation. So I think our system is being disciplined. And they certainly recognize that, we can't get ahead of where the customer is. And we've got to make sure that we stay competitive on pricing. Kevin Ozan: The only thing I'd add is, that 6% that Chris just threw out that's year-over-year, second quarter this year versus last year. Most of that was pricing that was taken over the last year, because we only increased prices about 0.5% actually in the second quarter. And as Chris mentioned, a lot of that has been driven by labor inflation pressure along with some food cost increases. But, as he said, we're pretty locked in with price costs, commodity costs for this year. So we feel good about that. Certainly, if the inflation pressures continue into next year that would impact everyone, including us. But right now, I think we feel pretty good about where we are. A – Mike Cieplak: Our next question is from Greg Francfort with Guggenheim. Greg Francfort: Hey, thanks for the question. Maybe just a follow-up to that. I know your company margins in the U.S. were 400 to 600 basis points, but I assume the franchisees are probably similar. How do you think that I guess trends over time? Do you think franchisees will underprice peers to try to take share? Does that get reinvested into labor? Or, do you kind of run it at a higher margin rate permanently? I'm just trying to think about how that dynamic plays out in terms of reinvestment over time. Thanks. Chris Kempczinski: Yeah, thanks for the question, Greg. A couple of things, on margins, I guess, let me start with company margins. Because, I think you guys maybe use those as a proxy for how the franchisees are doing. Certainly, we had very strong company margins in the second quarter here, some of that being driven by the higher average check. I think as we progress, we expect that to moderate a little bit, one from the higher wages that just began in the second quarter and will continue, obviously. And two, we think there may be some moderation on the average check, although we haven't seen that yet. But I think we're anticipating average check potentially to come down a little bit. From the franchisees side, as I mentioned, they still have record operating cash flow through May of this year. They are up over $100,000 in their cash flow over last year. So they certainly have the financial strength to be able to continue to reinvest in the business. And I think, in general on pricing, both we and our franchisees take a more consumer research-based approach than we would have several years ago. And so, it's based on consumer research, it looks at local prevailing market conditions, it looks at the competitive set within each area and then franchisees and the company obviously each make our own pricing decisions after that. But I think overall, we feel pretty good about the margins. But I would expect the U.S. to moderate a little bit from where we were in the second quarter. A – Mike Cieplak: Our next question is from Pete Saleh with BTIG. Pete Saleh: Great. Thank you. I wanted to ask about the dining rooms and the reopening of dining rooms. I think you guys said 70% of dining rooms are open today and you expect 100% by Labor Day. Are you guys getting any pushback from franchisees on this issue, given the ongoing staffing issues and really the record cash flows that they're experiencing? Just wondering if they see any reason to reopen their dining rooms. Chris Kempczinski: I think our franchisees recognize that the dining experience is an important part of what we offer at McDonald's. And certainly as we look at our competitors, we're also seeing that they have in many cases, their dining rooms open. So, I think our franchisees certainly understand that we need to get the dining rooms open. I think the question that you're kind of referencing here is just about the pacing of it. We're 70% open today and on our way toward getting to 100%. There is difficulty, as I mentioned earlier about some of the staffing so that is I think one thing that maybe is a little bit of a moderating effect on the pace that we've been able to get our dining rooms open. But broadly, there's not pushed back, there's not anybody kind of questioning why we need to have dining rooms open. It's a key part of what we offer here at McDonald's. We just have to work through some of the kind of what I would call transitory issues right now to just be able to get there by September. Kevin Ozan: And it is helpful obviously, to just relieve some pressure in the drive-through certainly to help in the dining rooms. We are seeing not sales levels go back to where they were in the dining room pre-pandemic, but certainly some of the drive-through sales are transferring over to dining rooms when we do reopen those. Chris Kempczinski: I would just maybe last thing on this, I mean, we are seeing a lift. When you open the dining room, you get a sales lift. And I think that more than anything is probably what will motivate franchisees to get the dining rooms open. A – Mike Cieplak: Our next question is from Lauren Silberman with Credit Suisse. Lauren Silberman: Thank you. On digital, the U.S. offers such great convenience and access with 95% drive-throughs across the asset base. So what is your confidence in being able to drive an increase in digital utilization through your direct digital channels, given already such great access? And then, is there anything you can share on the frequency of an average McDonald's customer, or to what extent drive-through transactions are impulse buys versus planned purchases? Chris Kempczinski: So, first what gives us confidence, I think it's just what we're seeing with customer reaction to loyalty already. We have as you've referenced a great drive-through business. But consumers and particularly younger consumers increasingly are looking at the app as sort of the way that they want to be interacting with McDonald's. And so far ability to actually have the app connect through the drive-through to be able to have loyalty be embedded in part of the drive-through experience, I think all of these things are part of the vision of these different service channels, different ways of accessing McDonald's, they all have to work kind of seamlessly together on that. And we're seeing good uptick. I mean, we had targets around where we wanted to see digital guest counts in restaurants, not just in the U.S., but around the globe. And we are either meeting or exceeding the growth that we're looking for in our digital guest count. So the customer is responding, the customer is excited about having a digital relationship with McDonald's, and they see the power of what the app can do for personalizing their experience. So that's what gives me confidence. It's just the numbers that we're seeing as a part of this. As to the question around drive-through, maybe I'll have that be something that Kevin answers on just purchase impulse. Kevin Ozan: Well, the only thing I'd say is, like the loyalty program that obviously we just launched, what we saw in our pilots are that loyalty did drive digital adoption, and also shorter purchase cycles or greater frequency of visits, if you will, of loyal customers. So we have seen that the digital engagement will generally drive people to the loyal customers, certainly, to return more frequently than they would have otherwise. So the digital engagement is just another piece of the whole ecosystem, as Chris talked about. And there are people that do plan the outings in addition to obviously, the impulse drive-through sales. Chris Kempczinski: And as we said in the release, we had $8 billion of digital sales in the first-half of the year, it's up 70%. So again, it goes back to the point, what gives me confidence is just the business results that we're seeing and the customer response to it. A – Mike Cieplak: Our next question is from John Ivankoe with JP Morgan. John Ivankoe: Hi, thank you. Two related questions, related points, I guess. In certain markets, like France have talked about vaccine passports, I guess, beginning in September, I think. What do you understand that to actually mean, if you were to actually have to enforce that in terms of how that you could potentially impact in-store consumption of your product? That’s kind of the first point. And, as we think about these franchisees that maybe you need to put some technology and staffing around that. Is there any thought that some of your increased technology spending that you've been talking about things that are obviously very value added for the franchisee could over time be offset by some increase in the franchise revenue that you receive? Thanks. Chris Kempczinski: So, I think your first question about what's happening at the country level, vaccine passport success, I would hate to even hazard a guess. Because, it seems like it's changing by the week, sometimes by the day on that. I think what we've shown though through the last 18-months is the ability of our system, when they're having to deal with different things at the local level, for our ability to respond to the system. And I think that's just, again, goes back to being a franchise business, having local owner operators that are able to kind of make these adjustments and pivot there. So again, I hate to hazard sort of what's going to happen, where and when, and how that impacts us. I think, I would just point out again that we've done a pretty good job, I think of navigating a whole bunch of changes over the last 18-months. And that certainly gives me confidence, as we look forward on sort of what the next phase of this looks like. From the standpoint of the things that we're talking about, and ways to deliver value to the franchisees, I think for us, we're certainly not looking at any of these things through the lens of who pays for what, and an opportunity to maybe go after anything on the revenue side there from a franchise standpoint, because frankly, we're too far away from any of that. So Apprente earlier, Apprente is still going to require significant work to go from 10 restaurants, to what ends up being hopefully 10,000 restaurants in the U.S. And as you get a better sense of what that might deliver as labor savings, what the cost of that, all those things we need to learn a lot more before we would ever contemplate what that means between the profit split with us and franchisees. So, premature for us to have any thoughts or conversations on that. A – Mike Cieplak: Our next question is from David Palmer with Evercore. David Palmer: Thanks. I just wanted to ask for a clarification on the previous point on the drive-through times in the U.S. And then I have a question on your McOpCo margins broadly. You mentioned how the drive-through times that improved by 30 seconds or so, and I think you mentioned that much of that had gone away. My understanding that a good bit of that might have been because of the loyalty launch, if you're talking, particularly in recent weeks. So I'm wondering if you could maybe speak to that. And if you're experiencing that improves in the test markets as you get through the launch phase, that would be helpful as well. And then and then with regard to McOpCo, 70% or so of your McOpCo stores are in the IOM. And clearly, that's a market that's just getting going. You had near peak levels of McOpCo margins in the second quarter. I guess my question is where can that go broadly? Do you think you're going to get to new peaks in McOpCo margins on a global basis? Are there productivity reasons for this beyond what's just going in terms of like the dining rooms being temporarily closed, and I'll stop there. Thanks. Chris Kempczinski: I'll do the service time and then I'll let Kevin handle the McOpCo margin. So on service time, just to be clear, so we did as I mentioned, we saw a 32nd improvement over the last few years. More recently, the three seconds slow down, that's off of the 32nd improvement, so call it a net 27 seconds improvement on that. The opportunity for us is as you may remember at the end of last year, David, when we had our Investor Day, we set an aspiration of getting another 20 seconds or so of speed, improve service time through the drive-through and the staffing changes have slowed some of the trajectory of improvement that we're seeing there. But, I certainly expect that we're going to be able to get back on continuing to whittle away at service times. I know that's what all the markets, including the U.S. are focused on. So it's more of just a slowing down of the improvement. There's certainly no meaningful going backward on this thing. And it's just the gains were too hard, but nobody's going to be willing to give up on service times. Kevin? Kevin Ozan: Yeah. And then on McOpCo margins, a couple things, as you mentioned, obviously, a lot of our McOpCos are over in Europe in the IOM segment. And we had strong margins, certainly in the second quarter. I would expect improvement in IOM margins over the course of the rest of the year. I don't know that we will get back to pre-COVID margins yet for this year, just because obviously, first quarter was still obviously pretty low as a lot of the restaurants were still had some restrictions, whether completely shut down or not. I do think going forward, there is opportunity to continue growing those international margins, at least back to historical levels, and potentially even a little higher, because of some of the efficiencies you've talked about, as well as average check is still a little bit elevated. And those two things combined are helping both the U.S. and our IOM McOpCos. So I do think there's opportunity to potentially on a global basis exceed our historical high margins. Chris Kempczinski: Hey, David, let me come back. Your friend Mike Cieplak here made sure I answer to your question in full. You had a question also about loyalty and impact on service time, so we are seeing when we introduce loyalty, it has a modest impact on service times about 10 seconds. But over kind of six to eight weeks, as both customers and crew get accustomed to it, we're able to pretty much whittle that back down to neutral on that. So there is an initial service time impact. But again, over six to eight weeks, we're able to work that out of the system. A – Mike Cieplak: We have time for one more question. We'll go to Jared Garber with Goldman Sachs. Q – Unidentified Analyst: Hi, this is Michael on for Jared. One quick last question here, you guys have spoken a little bit about the importance of dining reopening to the business more broadly. But with increasing the digital side of the business, and you have the strength in drive-through and some of those tech enhancements, are you guys thinking all about new formats, whether that's domestic or internationally, maybe to help accelerate growth in the future, non-traditional, et cetera? Thanks. Chris Kempczinski: Well, I think that's going to be one of the big areas for Manu to think about and look at is, do we need to think about format innovation as being part of how we offer this more seamless customer experience. We got different things out there in different markets, looking at no dining room as an example, delivery and drive-through only, restaurants. I know several years ago, we talked to you about MC Originals in France, which was a limited menu. So we've always got things that the markets are kind of experimenting with from a format standpoint, but part of Manu’s mandate is going to be to take a look at all of that, to understand the customer experience we want to provide, and if new format needs to be a part of that to be able to introduce that. I do think if we do anything on new format, it's going to be smaller footprint lower cost than what we have today. But again, Manu will probably at some point in the future be able to share with you more on that. Mike Cieplak: Okay. That completes our call. Thank you, Chris. Thank you, Kevin. Thanks, everyone for joining. Have a great day. Operator: Thank you. This concludes the McDonald's Corporation Investor Call. You may now disconnect.
MCD Ratings Summary
MCD Quant Ranking
Related Analysis

McDonald’s Beats Sales Forecasts Despite U.S. Weakness, International Markets Shine

McDonald’s (NYSE:MCD) shares rose more than 4% intra-day today after delivering better-than-expected comparable sales in the fourth quarter, with strong performance in international markets helping to offset weaker demand in the U.S. Despite slowing growth, the fast-food giant exceeded analyst expectations, driven by strength in the Middle East and Japan.

For the quarter, global same-store sales increased by 0.4%, a sharp slowdown from the 3.4% growth seen a year earlier. While consumer demand in the U.S. remained sluggish, the figure outpaced analyst projections, which had anticipated a decline of nearly 1%.

Internationally, McDonald’s saw a notable boost from its licensed markets, where same-store sales jumped 4.1%, far exceeding both last year’s modest 0.7% growth and expectations for a decline. The company highlighted strong demand in key regions such as Japan and the Middle East, which contributed significantly to the segment’s outperformance.

In response to shifting consumer spending, McDonald’s has been rolling out more budget-friendly menu options to attract price-conscious customers. This comes as the company works to recover from an E. coli outbreak last year, which impacted customer traffic and confidence. Leadership has reaffirmed its commitment to food safety and rebuilding trust, emphasizing efforts to regain momentum in the U.S. market.

On the financial side, total revenue for the quarter dipped slightly by 0.3% year-over-year to $6.39 billion, missing analyst estimates of $6.45 billion. However, operating income rose 2.4% to $2.87 billion, reflecting operational resilience despite the sales slowdown.

As McDonald’s navigates a challenging consumer landscape, international strength and strategic pricing adjustments will be key to driving future growth.

McDonald's Corporation (NYSE:MCD) Quarterly Earnings Preview

  • McDonald's is expected to report an EPS of $2.84 and revenue of $6.48 billion for the fourth quarter of 2024.
  • Despite a projected 4.8% decline in EPS, revenue is anticipated to grow by 1.1% due to digital adoption, new menu items, and unit expansion.
  • Financial metrics such as the P/E ratio of 25.59 and a debt-to-equity ratio of -10.32 highlight investor sentiment and financial health.

McDonald's Corporation (NYSE:MCD) is a global leader in the fast-food industry, known for its iconic golden arches and a menu that includes favorites like the Big Mac and McNuggets. The company operates thousands of restaurants worldwide, competing with other fast-food giants like Burger King and Wendy's. McDonald's is set to release its quarterly earnings on February 10, 2025, with analysts estimating an EPS of $2.84 and revenue of $6.48 billion.

The upcoming earnings report for the fourth quarter of 2024 is highly anticipated. Analysts expect McDonald's to report an EPS of $2.81, a 4.8% decline from the previous year. Despite this, revenue is projected to rise by 1.1% to $6.48 billion, driven by digital adoption, new menu items, and unit expansion. These factors have helped bolster the company's revenue, even as earnings face pressure.

Over the past month, the consensus EPS estimate has been revised downward by 1.3%. Such revisions are significant as they often signal potential investor actions and can impact the stock's short-term price performance. Investors will be keen to see if McDonald's can exceed these expectations, as a positive surprise could boost the stock price, while a miss might lead to a decline.

McDonald's financial metrics provide insight into its market valuation. The company has a P/E ratio of 25.59, indicating investor willingness to pay for its earnings. Its price-to-sales ratio is 8.13, reflecting the market's valuation of its revenue. The enterprise value to sales ratio is 10.14, and the enterprise value to operating cash flow ratio is 28.28, offering perspectives on the company's valuation relative to sales and cash flow.

The company's earnings yield is approximately 3.91%, providing a view of the return on investment. However, McDonald's has a debt-to-equity ratio of -10.32, indicating a higher level of debt compared to equity. The current ratio is 0.78, showing its ability to cover short-term liabilities with short-term assets. These financial metrics will be closely watched as the earnings report approaches.

McDonald’s Positioned for Growth in 2025, Jefferies Reiterates Buy Rating

Jefferies analysts reaffirmed their Buy rating on McDonald’s (NYSE:MCD) with a $345 price target, citing the fast-food giant as a top pick for 2025. The analysts highlighted the company’s strong positioning to gain market share and drive same-store sales (SSS) growth, even in a challenging quick-service restaurant (QSR) traffic environment.

McDonald’s momentum was expected to continue, supported by its focus on value-driven offerings, loyalty programs, and impactful marketing strategies. A new value-focused initiative planned for early January was anticipated to serve as a near-term catalyst. Additionally, the potential for modest reductions in general and administrative expenses and higher-than-expected unit growth could position McDonald’s for earnings outperformance in 2025 and 2026.

Over the long term, the analysts pointed to opportunities for margin expansion, robust free cash flow conversion, and strong total shareholder returns as key reasons for optimism. With its strategic initiatives and operational efficiency, McDonald’s appeared well-equipped to maintain leadership in the QSR sector and deliver sustainable growth.

McDonald's Corporation (NYSE:MCD) Analyst Update and Stock Performance

McDonald's Corporation (NYSE:MCD) is a global fast-food giant known for its iconic golden arches and a menu that includes burgers, fries, and breakfast items. The company operates in over 100 countries, serving millions of customers daily. McDonald's faces competition from other fast-food chains like Burger King and Wendy's, but it remains a leader in the industry.

On October 15, 2024, Brian Harbour from Morgan Stanley set a new price target for McDonald's Corporation (NYSE:MCD) at $340. At the time, the stock was priced at $313.34, indicating an 8.51% potential increase. This target reflects optimism about McDonald's future performance and aligns with a broader positive sentiment among analysts.

Analysts on Wall Street have adjusted their outlook for McDonald's, with some predicting a potential rally of around 13%. This change is part of a broader review of top market names, where analysts have updated their ratings. The current stock price of $313.34 reflects a 1.13% increase, or $3.50, from previous levels.

Today, McDonald's stock traded between $311.01 and $315.36, with the latter marking its highest price over the past year. The lowest price in the past year was $243.53. McDonald's has a market capitalization of approximately $224.77 billion, indicating its significant presence in the market.

The trading volume for McDonald's on the New York Stock Exchange is 2,609,818 shares. This level of activity suggests strong investor interest, possibly influenced by the recent analyst updates and the new price target set by Morgan Stanley.

McDonald's Buy Rating Maintained at Loop Capital

Loop Capital analysts reaffirmed a Buy rating on McDonald's (NYSE:MCD), maintaining a price target of $342 on the stock.

The analysts’ optimism follows McDonald’s decision to extend its popular $5 Meal Deal through the end of the year, rather than launching a new everyday value platform as originally planned. According to feedback from franchisee sources, this move is seen as a positive development for the broader quick-service restaurant industry. By opting to continue the $5 Meal Deal, McDonald's has alleviated concerns among competitors like Burger King and Wendy’s, who were wary of an aggressive price competition heading into the holiday season.

This decision reduces the likelihood of a value-based pricing war, which had been a concern for top competitors in the sector. The analysts believe that McDonald’s strategy will allow the company to maintain momentum without disrupting market dynamics, while also avoiding unnecessary margin pressure. Based on a valuation of 18 times the firm’s 2025 EV/EBITDA estimate, Loop Capital continues to see upside potential for McDonald’s stock, justifying its Buy rating.

McDonald's Corporation (NYSE:MCD) Receives Upgrade from Tigress Financial

  • Tigress Financial upgrades McDonald's Corporation (NYSE:MCD) to Buy, raising its price target to $360.
  • McDonald's is advancing its digital transformation strategy to enhance operations and customer experience.
  • The company's focus on digital innovation and the positive outlook from financial analysts suggest a promising future.

Tigress Financial recently shifted its perspective on McDonald's Corporation (NYSE:MCD), upgrading its rating to Buy from a previous hold position. This adjustment, announced on September 3, 2024, signifies a bullish outlook on McDonald's future financial performance. The firm also increased its price target for McDonald's from $355 to $360, as reported by TheFly. This move suggests a strong belief in McDonald's growth trajectory and its ability to deliver value to its shareholders.

McDonald's, a global leader in the fast-food industry, is not just about burgers and fries; it's also making significant strides in digital transformation. According to a company profile published by ResearchAndMarkets.com and announced on the same day as Tigress Financial's rating upgrade, McDonald's is pushing forward with a digital transformation strategy. This strategy includes the adoption of accelerators, incubators, and innovation programs aimed at bolstering the company's technological capabilities and enhancing its market position. Such initiatives are pivotal for McDonald's as they aim to improve operations and the overall customer experience, showcasing the company's commitment to leveraging digital innovation.

The timing of Tigress Financial's upgraded rating and McDonald's announcement of its digital transformation efforts could not be more opportune. As the company embarks on enhancing its technological footprint, investor confidence seems to be growing, reflected in the revised price target. This confidence is further supported by McDonald's stock performance, with a slight decrease of $1.47 or -0.5122%, indicating a stable market position with a market capitalization of approximately $204.82 billion. Despite the day-to-day fluctuations, McDonald's shares have shown resilience, reaching a high of $302.39 over the past year.

In contrast, the broader stock market has faced challenges, as highlighted by the significant decline in NVIDIA Corporation's (NASDAQ:NVDA) stock value following its second-quarter earnings report. This downturn, which erased a market value comparable to the combined worth of McDonald's, Disney, and Coinbase, underscores the volatile nature of the stock market. However, McDonald's steady market capitalization and strategic initiatives to embrace digital transformation set it apart, suggesting a potentially more stable investment option.

McDonald's commitment to digital innovation, combined with the positive outlook from Tigress Financial, paints a promising picture for the company's future. As McDonald's continues to integrate technology into its operations, it not only aims to enhance the customer experience but also solidify its position in the competitive fast-food industry. This strategic focus, coupled with the financial analysts' confidence, indicates a bright future for McDonald's, making it a noteworthy consideration for investors.

Evercore ISI Raises McDonald's Price Target to $320, Shares Gain 3%

McDonald's (NYSE:MCD) shares rose more than 3% on Monday after Evercore ISI analysts raised the price target on the stock from $300 to $320, while maintaining an Outperform rating, citing optimism about the US business recovery through the second half of 2024 and into 2025.

The analysts highlighted recent improvements in market share trends and a stronger brand perception, buoyed by successful sales initiatives like commemorative cups, which have positively impacted Q3 sales. They anticipate that McDonald's will effectively implement a value-driven, multi-tiered menu strategy, leading to stronger same-store sales (SSS) growth. The analysts adjusted their 2025 US SSS estimate from 2% to 3%, reflecting confidence in McDonald's long-term performance as the company benefits from easing federal rates and improved sales trends.