Will McDonald’s Deliver A Stellar Q3 2017?

by Trefis Team
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After it reported a more than 6% increase in comparable sales for Q2 2017, expectations from McDonald’s (NYSE:MCD) are high for Q3 2017. The company will report results for this quarter on Tuesday,  October 24 2017 and below is a summary of consensus analyst estimates for EPS (earnings per share) and revenues for this quarter:

Source: Yahoo Finance

The expected decline in revenues is due to McDonald’s transition towards a nearly 95% franchisee based model. This model would lead to higher profitability but lower revenues since the company would earn only franchisee royalties, which is a percentage of total revenues generated by the restaurants.

McDonald’s has been aggressively working on several technology and menu innovation initiatives to drive sales and increase guest count. The company stated that the increase in guest count in Q2 2017 was partly due to intelligent data analysis by the company in order to understand customer preferences. Below is a summary of the key developments in McDonald’s during Q3 2017 which might have a bearing on its results:

Strong Growth Plans In China: With new franchisee partners in place in China, McDonald’s has chalked out an aggressive growth plan for the region. The company is partnering with real estate developers in the region to open restaurants in residential areas to drive revenues. (Read Here’s How McDonald’s Is  Looking To Expand In China). However, in neighboring India, the company is facing franchisee troubles and had to shut down several restaurants in the region. We do not expect any significant impact of this development on the company’s financials. (Read Here’s Why McDonald’s Is Closing Nearly Half Of Its Restaurants In India).

Increased Focus On McCafe: McDonald’s is relaunching McCafe with a new look, new café-quality espresso beverage, and an expanded retail offering. This focus is aimed towards cashing-in on the coffee culture and is likely to drive revenues for the company. (Read Here’s Why McDonald’s Is Relaunching McCafe).

Experience Of The Future Stores: McDonald’s is re-designing its stores with a focus on efficiency, more personalization, and better customer engagement. The company is integrating its digital ordering platform with its new store design and this is likely to drive long term sales growth. (Read Here’s How McDonald’ s Can Benefit From Integrating Its Digital Initiatives).

Challenging Industry Environment, Hurricane Impact Can Drag Down Sales

After a minor recovery in June, the restaurant industry remained challenging in Q3 2017 with comparable sales and comp traffic declining in all three months of the quarter, according to data published by TDn2K. This data is based on weekly sales of nearly 30,000 restaurant units.  However, signs of improvement are seen in September where same store sales were much better compared to July.

While quick service and fast causal restaurants are performing better than other formats, the two major hurricanes in the U.S. are likely to impact sales negatively. In the last week of August comparable sales in Texas declined by 15% due to the impact of Hurricane Harvey.  McDonald’s operates nearly 1,200 restaurants in Texas and there might be a material impact on the company’s financials due to Hurricane Harvey. Similarly, Hurricane Irma which affected Florida is likely to have an impact on McDonald’s – the company operates 900 restaurants in the region. (Read Here’s How Hurricanes Harvey And Irma Could Impact McDonald’s). Same store sales in Florida declined by 6.2% in September due to the impact of the storm. While consumer spending has increased after the hurricanes towards rebuilding efforts, this will not have a positive impact on restaurants.

While McDonald’s has been working on several measures to keep up its growth momentum, its Q3 2017 results could be impacted by the recent hurricanes. We will be closely watching the increase in guest count –without the hurricane impact.

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