McDonald’s (MCD) is on the Hedgeye Restaurants LONG bench.
HEDGEYE OPINION
I’m still nervous about MCD…but a little less nervous.
The company still faces a difficult same-store sales comparison in 4Q, but today’s results shine a glimmer of hope that the juggernaut can get it done. Revenue beat estimates, coming in at $6.42 (vs FactSet $6.28), driven by All Day Breakfast and the McPick 2 promotion, both of which management reiterate are here to stay. Earnings per share rose 7% to $1.50 (vs FactSet $1.48), while domestic same-store sales rose 1.3% and International Lead same-store sales hurdled estimates of +1.9%, coming in at +3.3%.
Despite the recent changes in management, leadership emphasized that they now have a “world-class” team, seemingly implying that it was not “world class” before, and stated that those in position possess the appropriate skillset needed for such a transition. Leadership also touched on CAPEX moving forward, as they plan on converting some countries to developmental licensees in order to free up some capital, which will be redistributed to the U.S. to be spent on development of the Experience of the Future investment.
NOTABLE COMPANY THOUGHTS:
“Certainly as we go through quarter four and into 1Q17, we're planning to grow our business. Now there's going to be ebbs and flows within the global business and where those pockets of success happen, and that is why our geographic diversification is one of our greater advantages. But we're planning to grow on like-for-like sales and we see that as being the life blood of our business as we look out over the medium to long term as well.”
HEDGEYE – The overhang of declining 4Q16 SSS in the USA will not go away.
In response to a question regarding how the food at home versus food away from home inflation has affected MCD: “The gap clearly plays a role, but it’s not the sole reason. I think it is an element; but I think when you’re a lower average check business like we are, I don’t think it magnifies out the same as if we were a midscale dining business,” (Stephen J. Eastbrook, CEO)
HEDGEYE – FAFH is not impacting the QSR companies
“From a leadership perspective, I’m excited to talk about where we’re at. We’re heading into 2017 now with a world-class team that one would expect for a world-class business. And as you go through the various phases of a turnaround into growth, there are times when the skillsets required as we transition also need to change,” (Stephen J. Eastbrook, CEO)
HEDGEYE – This will take time to see how it plays out.
“There are broader macroeconomic issues of consumer confidence and just uncertainty over wage increases. There’s slight squeeze on discretionary spend, with gas prices edging back up and healthcare costs going back up…so I think those are the sort of things we see affecting customers,” (Stephen J. Eastbrook, CEO)
HEDGEYE – Known knowns
“Regarding unit growth, we brought it down by around 100 units. We had 1000 last quarter, now we’ve set it at about 900. It’s a little in various markets; a few in China, a few in Spain, nothing of significance. The reallocation is really to some of these investment areas that Steve was just talking about, certainly in places where we are implementing Experience of the Future,” (Kevin M. Ozan, CFO)
HEDGEYE – MCD demonstrating capital discipline
“Regarding capital, right now, as you know, we're right around $2 billion. What you may see in the near term is as we convert some of these countries to developmental licensees where we free up some of that capital, some of that may be redeployed to the US to spend on this Experience of the Future investment that Steve was talking about. So you could see some reallocation of that capital in the next few years that would effectively keep our capital envelope relatively similar to what it is today. And then, once that is complete, it is likely to go down after that. But in the near term we may reallocate some of the capital that we have freed up to spending to accelerate that US Experience of the Future investment.”
HEDGEYE – Capital spending should be coming down faster.
QUICK COMPS:
- Revenue: $6.42bn vs Factset $6.28bn
- EPS $1.50 vs Factset $1.48 (includes the $0.12 in previously announced charges)
- Same Store Sales
— U.S. +1.3% vs FactSet +1.3%
— International Lead Markets +3.3% vs FactSet +1.9%
— High Growth Markets +1.5% vs FactSet +0.3%
— Foundation Markets +10.1% vs FactSet +2.3%
- Operating Income
— U.S. +8%
— International Lead Markets +5%
— High Growth Markets +10%
- Company-operated Margin 18.4% vs FactSet 16.9%
- Franchise Margin 82.2% vs FactSet 82.3%
- SG&A 9.1% vs 9.4%
Outlook:
- Expect commodity costs in the U.S. to be down 4.5-5% for the year
- International Leads commodity costs segment are expected to be flat (remain at 1%)
- Remain on track to re-franchise 4,000 restaurants by the end of 2018
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
