All-Day Breakfast & Efficient Recovery Efforts In Asian Markets Take MCD Stock To All-Time High

The fast-food industry leader, McDonald’s (NYSE: MCD), has revived from the terrible phase it was going through last year, as it reported a strong comeback in Q4 2015, resulting in a better-than-expected result for the entire fiscal year 2015. Twelve months back, no one would have thought that the Golden Arches would end the fiscal year with a positive comparable store sales growth. The perfect execution of the turnaround plan, the new and innovative menu additions, and marketing initiatives to attract more customers, instilled positive sentiments among the investors, leading the stock to its all-time high of $122.

Trefis has a $107 price estimate for McDonald’s, which is roughly 13% below the current market price.

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The key drivers that led to an unexpectedly strong fourth quarter are the improved situation in China and Japan, as well as the introduction of All-day breakfast.

All-Day Breakfast Boosts Top-line Growth

Last year, in October, the burger giant announced its plan to serve some of its breakfast menu items throughout the day. ^[1] Last month, a study reported that this initiative has been luring in more customers, effectively leading to better comparable store sales growth. ^[2] According to a report by NPD group, in the first two months of the initiative, one-third of the breakfast buyers who purchased breakfast in non-traditional hours were new customers. Moreover, most of them were interested in purchasing the breakfast items during lunch hours. Among the customers who purchased breakfast items during lunch hours, more than 60% of the transactions also included non-breakfast items. ^[3] This indicates that not only does this initiative help improve the customer count, but is also boosting the sales of other food items, resulting in improved average spend per customer visit. (See: Is McDonald’s’ All Day Breakfast Strategy Working?)

McDonald’s revenue increased 5% in constant currencies for the fourth quarter, with the diluted EPS rising 26% year-over-year (y-o-y). ^[4] As a result, McDonald’s global comparable store sales grew 5% in the fourth quarter, with a 5.7% increase in comparable sales in the U.S. This initiative has further helped the company in regaining its lost market share. The all-day breakfast strategy is still effective in 300 U.S. stores, and the company plans to take this initiative nationwide later in Q1 2016.

China & Japan Instrumental In Above-Expectation Performance

With the help of focused recovery efforts and efficient marketing strategy, the performance of the company in China and Japan was commendable. In the fourth quarter, China comparable store sales grew 4% primarily driven by innovative menu additions, value offerings and strong performance during breakfast hours. In fact, China is the next focus market for the company, as it plans to open close to 250 new stores in the country this year. On the other hand, Japan’s comparable sales increased 1.6% in Q4 2015. Although this growth looks excellent due to comparison with dull performance in Q4 2014 due to the meat supplier issue, the fact that it is the best quarterly performance in Japan in the last four years clearly indicates the efficiency of recovery efforts in the region.

Most of the analysts were speculating the results to be negatively impacted by Japan’s dull performance throughout the year, as indicated by McDonald’s full year guidance for its Japan unit. (See: McDonald’s FY2015 Earnings Preview: Story Of A Perfect Comeback) Not only did the customer perception improve in the region, but it was reflected in the financial performance, as well. McDonald’s high growth markets witnessed 3% growth in comparable store sales in Q4 2015 and 1.8% growth for the full year. Accelerated progress in the Asian markets might be a strong justification for the company’s stock performance over the last 2 months.

McDonald’s believes that commodity costs for the company’s international lead segment in 2016 will remain flat whereas it will decline by 1-2% in the U.S. markets. Moreover, most of the company’s planned capital expenditure for 2016 will partly be used for the opening up of new restaurants, and the remainder in the development of existing restaurants.

Earnings Takeaway:

• Q4 2015 net revenues decline 4% (increased 5% in constant currencies) to $6.34 billion
• Q4 2015 net income increased 10% to $1.2 billion
• FY2015 net revenues declined 7% (increased 3% in constant currencies) to $25.4 billion
• FY 2015 net income decreased 5% (increased 5% in constant currencies) to $4.53 billion

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More Trefis Research

1. Let There Be Breakfast: McDonald’s Serving All Day Breakfast Starting October 6, news.mcdonalds.com [↩]
2. McDonald’s All Day Breakfast Is Luring Customers, Study Finds, The Wall Street Journal, December 8, 2015 [↩]
3. Two months into it, McDonald’s All-day breakfast is increasing visits and luring in new customers, finds NPD, www.npd.com, December 9, 2015 [↩]
4. McDonald’s Q4 2015, earnings conference call [↩]