MCD
McDonald's (MCD) traded higher yesterday after the company posted a solid 3Q21 earnings. During the earnings call, the company touched on staffing challenges and noted that franchisees had increased wages 10% year-to-date and company-owned restaurant wage costs are up 15%. Like others in the industry, McDonald's continues to have trouble finding all the workers it needs. CEO Chris Kempczinski said that the labor shortage is causing restaurants to close earlier than scheduled and lowering the speed of service. He expects the situation to remain challenging over the next several quarters.
To help solve the problem, McDonald's is turning to IBM by selling its AI-business, McD Tech Labs, formerly known as Apprente, to IBM as part of a partnership to develop voice-recognition ordering in McDonald's drive-thru lanes. "In my mind, IBM is the ideal partner for McDonald's given their expertise in building AI-powered customer care solutions and voice recognition," said Kempczinksi. McDonald's has already piloted the technology at several Chicago restaurants and reported "substantial benefits to customers" and crew members. The higher labor costs and higher commodity costs projected to rise 3.5% to 4.0% on the year are being passed on to consumers in the form of higher prices. McDonald's expects prices to be 6% higher this year than last year but lower than the 7.5% that Chipotle expects in Q4. Both are significantly higher than EAT's 3-3.5% increase.
Other notable actions:
- It is renegotiating deals with delivery providers
- Digital orders in the top 6 markets are over 20% of sales, or about $13 billion (app, a kiosk in restaurants, or delivery.)
- Order sizes are still up
- Loyalty is killing it - 21 million members enrolled, with over 15 million active loyalty members earning rewards.
China is seeing negative same-store sales and continues to be impacted by COVID resurgences, which restarted in June and lasted throughout the quarter, and a softening economy. The market continues to build its digital presence as they now have over 100 million active digital members. MCD has accelerated new restaurant growth in China, with over 500 new restaurants already opened this year and 650 restaurants for the year
"China remains a critically important market for us and one where we have confidence in the long-term opportunity. So we plan to get even more aggressive in opening new restaurants in this market."
Black Box (Wk ending October 17, 2021)
The industry posted the most robust results in the past four weeks for the week ending October 17. YoY check growth was the highest growth recorded since mid-April. QSR, fast-casual and casual dining improved the most (improved sales growth by 1.9%). Only nine states had negative sales growth during the week: Wisconsin, Connecticut, Massachusetts, Oregon, Montana, Vermont, North Dakota, Wyoming, and Hawaii.
YUM & YUMC
We recently removed YUM from the LONG list but would add it back on any potential weakness.
YUM! Brands reports 3Q21 adjusted EPS $1.22 vs FactSet $1.08; Revenue $1.61B vs FactSet $1.59B; Worldwide comps +5% vs FactSet 5.8%. Management Comments: "Our Q3 results, led by record-breaking unit development and sustained momentum in digital sales, are a testament to the strength of our Brands and the unmatched commitment and capability of our best-in-class franchise partners. I am proud that each of our global divisions contributed to delivering 760 net-new units in the quarter. Our 5% same-store sales growth for Q3, or 3% same-store sales growth on a 2-year basis, demonstrates the resilience of our diversified global business model despite the headwind of the Delta variant in certain key markets. During the quarter, the company acquired Dragontail and its AI-based integrated kitchen order management and delivery technologies to strengthen store operations, enhance the customer experience, and make it easier for team members to run a restaurant.
Also, during the quarter, YUM recorded $52 million of pre-tax investment income related to the change in fair value of our approximate 5% investment in Devyani International Limited. This entity operates KFC and Pizza Hut franchise units in India that executed an initial public offering during the quarter. This change in fair value resulted in a $0.16 benefit to third-quarter EPS.
Yum China Holdings (YUMC) 3Q21 Non-GAAP EPS of $0.22 misses by $0.06; GAAP EPS of $0.24 misses by $0.14; and Revenue of $2.55B (+8.5% Y/Y) beats by $50M. Same-store sales decreased 7 % year over year, with decreases of 8% at KFC and 5% at Pizza Hut, excluding F/X. The restaurant margin was 12.2%, compared with 18.6% a year ago. Delivery contributed to ~34% of KFC and Pizza Hut's sales in Q3. Digital orders, including delivery, mobile orders, and kiosk orders, accounted for ~87% of KFC and Pizza Hut's sales during the quarter. Adjusted operating profit fell 48% Y/Y to $168M. CEO update: "We expect that COVID-19, especially the Delta variant outbreaks, will continue to affect consumer behavior and impact our same-store sales recovery... We are focused on driving sales by leveraging our member base and digital channels, launching great food for both dine-in and home consumption, and enhancing our hybrid delivery model." Yum China opened 524 stores during the quarter and plans to open approximately 5Knew Lavazza stores by 2025.
