Shares of McDonald's (MCD – Free McDonald’s Stock Report) rallied to an all-time high after the restaurant operator delivered a blow-out performance in the second quarter. Management's strategy (more below) is clearly working, as the company just delivered its best global comparable-store sales and guest counts in more than five years.
Specifically, same-store sales rose 6.6%, reflecting positive guest counts in all of McDonald's operating segments. The most robust growth was seen in the Foundational Markets and Corporate segment, where comps jumped 13.0%, driven by ongoing recovery in Japan. The metric rose 7.0% in the High Growth segment, thanks to positive results across the region, with notable strength in China. Turning to the International Lead business, momentum in the United Kingdom, along with strength in Canada and Germany, helped drive a 6.3% increase in same-restaurant sales. Lastly, comps on our shores were up 3.9%. We had expected a more challenging quarter in the United States, partially due to stiff competition, but the cold beverage value promotion (which ran nationwide) and the introduction of Signature Crafted premium sandwiches resulted in the stronger-than-anticipated sales figures.
In aggregate, systemwide sales rose 8% on a constant-currency basis, although the company's top line actually fell 3% (down 2% in constant currencies) because of management's strategic refranchising initiatives. Consequently, the actual second-quarter revenue figure was not of great interest to investors, but we should note that at $6.050 billion, the top line was ahead of our $5.900 billion forecast. Robust same-store sales, cost-containment initiatives, refranchisings, and stock repurchases all helped adjusted earnings rise 19% from a year earlier, to $1.73 a share. This easily topped our call of $1.55.
June-period results demonstrated that management's customer-centric approach is working. Its focus is on retaining existing customers, bringing back lost customers, and converting sporadic visitors into regulars. Investments in technology (kiosk and mobile ordering/payment) are geared toward speeding service, increasing convenience, and elevating the consumer experience. Restaurant remodels and delivery options serve the same purpose. All told, we look for the earnings momentum to continue.
As for the stock, it is obviously not cheap, having just hit an all-time high. However, these are high quality shares that have a number of attributes prized by conservative accounts. These include top scores for Safety and Price Stability; a low Beta; and an attractive dividend yield. Too, the company garners our best mark for Financial Strength. While value investors may balk at the equity's price, the aforementioned factors may be enough to entice the risk-averse crowd.
About The Company: McDonald's is a quick service restaurant with over 36,000 locations in more than 100 countries (as of March 31, 2017). The majority of the restaurants (roughly 85%) are operated by franchisees or affiliates. The company is best known for its hamburgers and French fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
