McDonald’s Q3 FY 2016 Earnings Preview: Top Line To Be Weighed Down By Industry-Wide Declines

+6.73%
Upside
282
Market
301
Trefis
MCD: McDonald's logo
MCD
McDonald's

19102

Key Trends:

  • McDonald’s has proposed a “Happy Meal” for breakfast for kids, and started a pilot test for the product in two regions, Tulsa and Oklahoma, in over 70 restaurants. If successful, we can expect a nation-wide roll-out of the first new entree for Happy Meals in more than 30 years, which, in turn, could help the company annex a larger slice of the restaurant market.
  • Expanding its all day menu to include items like McGriddles, hotcakes, sausage burritos, oatmeal, and hash-browns, in addition to McMuffin and biscuit sandwiches, introduced in September, in order to keep the buzz around All Day Breakfast alive.
  • Initiatives such as shifting from margarine to butter, piloting fresh patties, transitioning to free range eggs, and removing preservatives from some of its food items, to project the image of healthy and nutritional food.
  • Use improved technology to allow customers to customize food, improve customer service, and increase satisfaction, while boosting efficiency, and gathering valuable data on local tastes.
  • To revive its business in the China/Asia Pacific region, McDonald’s has come up with a new strategy which entails selling-off  some 2,800 odd restaurants in China, Hong Kong, and Korea. This will essentially lead to the company-operated restaurants being converted into independently run franchisees.
  • The softening in company-operated revenues is expected to continue primarily due to the negative impact of refranchising, as the company-operated sales will be increasingly replaced by franchised revenues in the form of rent and royalty, based on a percentage of sales.
  • Focus on completion of its three-year $30 billion share buyback target, in order to support the bottom line, even as the top line continues to suffer.
  • An industry-wide slowdown due to a lesser number of people eating out. This is being speculated to happen due to grocery prices lagging behind menu prices, discouraging people from eating out. The trend is confirmed by September same store sales and traffic data, showing a decline of 1.1% and 3.5%, respectively. The high costs of labor and healthcare further worsen the situation for the restaurant industry, by causing people to substitute spending on eating out on more basic necessities of healthcare.

Have more questions on McDonald’s? See the links below.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for McDonald’s

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