Why Has McDonald’s Stock Price Risen 20% Over The Last One Year?
McDonald’s growth engine started losing steam at the beginning of the third quarter of 2014, with revenues falling 6.6% year-over-year in the quarter. For the first time after 2009, consolidated revenues were down 2.4% y-o-y in 2014. However, this fall was less than expected due to some growth being seen in the first two quarters of 2014. The decline steepened in 2015 as revenues fell by 7.4% y-o-y. Unfortunately for McDonald’s, this downtrend has sustained, with every quarter garnering less revenues on a comparable basis. Most of the aforementioned fall is attributable to the changing consumer tastes and preferences towards healthier food with more nutritional value, and an economic weakening in the U.S.
To turn its revenue growth positive again, the company came up with a turnaround plan towards the end of 2015. This turnaround plan entailed launch of All Day Breakfast, simplification of the menu, introduction of healthier food options, and fringe benefits to support its employees. This turnaround has been immensely successful for the company, as can be seen through a 20% rise in McDonald’s stock price over the course of the last one year.
In this note, we discuss some of the reasons which led to a rise in McDonald’s stock value.
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Launch of All Day Breakfast
McDonald’s introduced all-day breakfast in October 2015, in response to customer requests to serve their popular McMuffin throughout the day. Since its introduction, the company has seen a recovery in its comparable store sales data, especially in the U.S., which increased nearly 6% in Q1 2016. The company is expanding its All Day Breakfast menu by adding Biscuit Sandwiches, McMuffin Sandwiches, and McGriddles to its national menu, starting this September.
Consequently, we expect annual customers per McDonald’s restaurant to increase gradually from around 650,000 in 2016 to nearly 675,000 by the end of our forecast period.
Innovation and Introduction of New Menu Items
Innovation stemming from responsiveness to customers and franchisees has played a big role in McDonald’s fending off stagnation over the years. Along with the introduction of new, healthier menu items, McDonald’s has focused on simplifying its offering while removing complex products. In addition to streamlined menus, improved order accuracy and speed, investments in food quality, and ingredients to adapt to the changing consumer preferences, is helping driving sales at McDonald’s. However, the healthier options could lead to a higher priced menu, impacting the company negatively in the long term. To ensure that it maintains its “value” appeal, the company is pulling out all the tricks in the box to decrease its operating costs. In the latest earnings transcript, management said that it hopes to cut $500 million in expenses, with $350 million of the cuts expected to be completed by the end of 2017.
Focus Towards a 95% Franchisee Model
Franchised restaurants have much higher margins, almost five times that of company operated restaurants, due to negligible operating expenses. In a bid to stay profitable, while refraining from investing its own capital in the new growth areas which are likely perceived as high risk, McDonald’s is making efforts at becoming 95% franchised. Although, the shift in the revenue mix towards franchisees would decrease the company’s top line, it would help bolster margins.
The company expects the majority of the refranchising to take place in the High Growth and Foundational markets, which mostly cover countries in Asia, Africa, and the Middle East. The aforementioned geographical segments have very low penetration currently. As a part of this plan, McDonald’s will be refranchising about 4,000 restaurants through 2018 in these areas, furthering its outreach and growing its brands in areas with low penetration.
Beating Consensus
For the past few quarters, McDonald’s has consistently beaten the consensus estimate for revenue and earnings per share, performing much better than expected. This has buoyed investor sentiment, helping the stock’s upward trajectory.
Source: Reuters
Have more questions on McDonald’s? See the links below.
- Why Is McDonald’s Concentrating On Refranchising?
- Is McDonald’s Dependence On High Growth Markets Increasing?
- McDonald’s Versus Burger King: Whose Franchisees Perform Better?
- McDonald’s Slows Down In Q2’16, Despite Growth In Comparable Store Sales
- McDonald’s Q2 FY 2016 Earnings Preview: Investment In Quality, All Day Breakfast To Drive Revenues
- McDonald’s 2016 Revenues To Decline YoY Despite Improvement; To Pick Up Pace Thereafter
- What’s McDonald’s Fundamental Value Based On Expected 2016 Results? (Updated After Q1 2016)
- By What Percentage Have McDonald’s Revenues And EBITDA Grown Over The Last Five Years?
- What Is McDonald’s Revenue & EBITDA Breakdown? (Updated After Q1 2016)
- How Has McDonald’s Revenue And EBITDA Composition Changed Over 2011-2015?
- McDonald’s Q1 FY 2016 Earnings Preview: All Day Breakfast To Drive Comp Sales In The US
- Where Will McDonald’s Revenue And EBITDA Growth Come From Over The Next Three Years? (Updated After Q1 2016)
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