VALUATION HIGHLIGHTS

1. U.S. constitutes 49% of the Trefis price estimate for McDonald's's stock.
2. International Operated Markets constitute 48% of the Trefis price estimate for McDonald's's stock.

WHAT HAS CHANGED?

MCD Tops Q4 Estimates

In Q4, McDonald's revenue declined 1% year-over-year (y-o-y) to $5.9 billion, but beat analyst estimates by $180 million. The company's global comparable sales increased 12.6% for the quarter, with double-digit growth across all segments. This gain came against a strong comparable from a year ago of +12.3%. In addition, MCD's full-year comparable sales grew by over 10%, and comparable guest counts grew by 5% - thanks to more customer visits, price increases, and marketing promotions. Successful menu and marketing campaigns, such as the Cactus Plant Flea Market promotion and McRib, and continued digital and delivery growth contributed to strong comparable sales results.

Operating profit margin dropped from the near 45% rate the company set a year ago, to the current 40% in fiscal 2022 - thanks to rising costs. The weakening of all major currencies against the U.S. dollar has also been a major headwind for McDonald's all year in 2022.

2023 Outlook

McDonald's anticipates almost 4% unit growth from about 1,500 net restaurant additions in 2023. The company expects this to contribute along with restaurants opened in 2022, nearly 1.5% to system-wide sales growth. But the company also warned that commodity, utility, and labor inflation will continue to be a drag on margins this year. The key pullout may be that even as sales stay strong, MCD expects the 2023 operating margin to be about 45% of sales compared to the consensus mark of 46.5%.

Closure of Russian Business

The closure of McDonald's locations in Russia impacted the company substantially. When McDonald's chose to sell its 850 stores in Russia because of the country's invasion of Ukraine, it effectively cut out 2% of systemwide sales, 7% of revenue, and 2% of operating income for the corporation. McDonald's was forced to temporarily close many locations across Ukraine as well, many of which remain shuttered.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of McDonald's value that present opportunities for upside or downside to the current Trefis price estimate:

Average Revenue Per U.S. Restaurant: Historically, the Average Revenue per restaurant (both company-owned and franchised) has increased and as the company focuses on a combination of value and gourmet products, revenue per restaurant is likely to increase with the higher ticket price. Further increasing guest count with higher comparable sales is likely to drive this metric further over our forecast period.

Number of franchise restaurants in high-growth markets: McDonald's is working towards a goal of being a 95% franchised entity and growth in the number of franchised restaurants is improving profitability. Further, as the company expands and adds more restaurants, systemwide sales are likely to grow.

BUSINESS SUMMARY

The Company franchises and operates McDonald's restaurants, which serve a locally-relevant menu of quality food and beverages in communities across 119 countries. Of the 40,275 McDonald's restaurants at year-end 2022, 37,295, or 93%, were franchised. McDonald's franchisees typically don't own the building. These franchisees agree to rent their stores from the parent company, giving them extra income in addition to franchise fees and other royalties.

McDonald's essentially offers a uniform menu, though with minor variations to suit the local taste. A typical McDonald's menu includes burgers, sandwiches, salads, snacks, breakfast sandwiches (McMuffins), beverages (soft drinks, coffee, milkshakes, juices), and desserts (ice cream, pies, smoothies).

McDonald's competes primarily with Wendy's and Burger King in the hamburger fast food category. It competes with Starbucks through McCafe.

SOURCES OF VALUE

McDonald's classifies its operations into the following three segments:

1. U.S.
2. International Operated Markets
3. International Developmental Licensed Markets and Corporate

KEY TRENDS

McCafe gives McDonald's a strong presence in the specialty coffee segment

McCafe represents McDonald's foray into the high-margin caffeinated beverages market dominated by premium coffee chain Starbucks. McDonald's has been able to keep the prices competitive and margins healthy due to its excellent store network, marketing muscle, and highly efficient supply chain. McCafe's menu has been extended to more than coffee and now includes fruit smoothies, mocha, and chocolate shakes.

Competition among the top fast-food chains to intensify in the breakfast segment

The breakfast market is proving to be a profitable segment, especially in the U.S. McDonald's is the dominant player in the breakfast segment with a market share of over 30%. McDonald's ensures new items are added to the breakfast menu regularly. However, it now faces serious competition as a number of rivals such as Dunkin' Brands, Restaurant Brands International, Taco Bell, and Starbucks have stepped up their game in the breakfast segment. Starbucks is in the process of reinvigorating its breakfast menu with the help of baked goodies launched under the La Boulange brand. Restaurant Brands International houses two well-renowned brands: Burger King and Tim Hortons, both of which already have a strong presence in the breakfast market. Dunkin' Donuts has also revamped its breakfast menu to cater to the needs of its customers.

Store Redesign, Value Meals To Drive Growth

McDonald's is in the process of converting its stores into "Experience Of The Future" restaurants, providing technological convenience to its customers. The company's focus on balancing its innovative gourmet offerings to attract millennials with its value focus to retain existing customers is likely to drive growth in the future.