McDonald’s (MCD) is on the Hedgeye Restaurants SHORT bench.
HEDGEYE OPINION
We moved MCD from the LONG bench to the SHORT bench on January 8, 2017 due primarily to the high comp hurdles in front of them and their announcement to double down on McCafe in 2017. Although MCD was able to report in-line same-store sales in the U.S. in 4Q16, current estimates are projecting a 20bps sequential acceleration in the two-year average in 1Q17. We don’t see the increased focus on coffee to be a driver of comp acceleration, because simply put, it wasn’t the last time they tried it. MCD is a food company not a coffee company, and the sooner they realize and stick to that belief, the better.
Going into today’s call, MCD faced a difficult same-store sales comparison this quarter. Though not able to outdo last year’s performance, MCD posted better than expected topline figures. Revenue slightly beat estimates, coming in at $6.03 billion (vs FactSet $6.00 billion), once again driven by All Day Breakfast and their McPick 2 promotion, the first of which management disclosed has been implemented in the Australian market, to great success. Earnings per share posted a slight beat ($1.44 vs FactSet $1.41), and U.S. same-store sales was reported to be -1.3% vs FactSet -1.4%. It is also worth noting that management did not provide any full-year 2017 guidance, but plan to do so at their Investor Day in March.
Management once again stressed their improved management team, and highlighted the expanded roles and responsibilities given to each member of the leadership team, in an effort to increase the company’s efficiency. Other hot topics included commodity & labor inflation, and FAH vs FAFH inflation. According to management, the company benefited from a benign commodity environment in 2016, but continued to experience labor inflation in many markets. However, they have used pricing as a way to minimize labor cost pressure, ending 2016 with a 2.8% price increase in the United States, which was relatively in-line with Food Away From Home inflation of 2.3%.
We don’t believe that MCD has material downside from here, given certain characteristics of the company: asset light, dividend, buybacks, etc. But we do believe it is going to be an underperformer versus its competitors, given it may have used its only silver bullet when the company launched All Day Breakfast in 2015.
NOTABLE COMPANY THOUGHTS:
“We applied the necessary rigor and discipline to strengthen the company and our financial performance. Our efforts yielded a more streamlined and focused organization that generated solid Q4 and full year results, including our strongest annual global comparable sales growth since 2011…I am confident that we’re on the right path as we pursue our goal of being recognized by our customers as the modern, progressive burger company,” (Steve Easterbrook, CEO).
HEDGEYE– MCD is not Starbucks, and odds are they never will be. Therefore, it is imperative that the company focuses on what has made it such a success, their FOOD. This quote from Mr. Easterbrook appears to show that management is starting to come to grips with this reality. But we will hold our breath until after the investor meeting to see if they are maintaining their increased focus on coffee or not; doing so would spell danger ahead.
“We benefited from a benign commodity environment in 2016, although we continue to experience labor inflation in many markets around the world,” (Kevin M. Ozan, CFO & Executive VP).
HEDGEYE – With beef deflation still trending downward, we expect MCD to continue to benefit from this to some extent, while working to offset increasing labor costs.
“Menu pricing is one way to help mitigate some of these cost pressures. We ended 2016 with a 2.8% price increase in the U.S., relatively in line with Food Away From Home inflation of 2.3%. We’re mindful of the disparity between grocery store inflation and Food Away From Home, so we’ll continue to carefully balance strategic pricing decisions with our focus on growing guest counts,” (Kevin M. Ozan, CFO & Executive VP).
HEDGEYE – With the inflation differential between Food At Home and Food Away From Home improving 20bps in December to -4.3%, MCD will still be faced with significant headwinds in regards to this metric for the foreseeable future.
“You may have noticed we’ve been curious as to whether there’s an opportunity for us to serve the food at home market as well. We have initiated very, very early stages just a small part of that test down in Florida to see whether home delivery could be something that helps to address consumer demand both at home and away from home,” (Steve Easterbrook, CEO).
HEDGEYE – The delivery arms race is well underway, and MCD is hoping to eventually facilitate greater consumer interaction via home delivery.
QUICK COMPS:
- Revenue: $6.03B vs Factset $6.00
- EPS $1.44 vs Factset $1.41
- Same-Store Sales:
- U.S.: -1.3% vs FactSet -1.4%
- Global comparable sales: +2.7%
- International Lead Markets: +2.8% vs FactSet +2.4%
- High Growth Markets: +4.7% vs FactSet +2.3%
- Foundation Markets: +11.1% vs FactSet +4.6%
- Company-operated margin: 16.9% vs FactSet 17.0%, and year-ago 15.2%
- Franchise margin: 81.7% vs FactSet 82.0% and year-ago 82.0%
- SG&A: 10.4% of revenue vs FactSet 10.7% and year-ago 10.6%
- Returned $2.2B to shareholders this year through share repurchases and dividends in 4Q.
Full Year Highlights:
- Global Comparable sales: +3.8%, this includes positive comparable sales across MCD’s segments.
- Consolidated Revenues: -3.0%
- Diluted EPS: $5.44 vs Consensus $5.71
- Returned $14.2B to shareholders this year through share repurchases and dividends.
Outlook:
- **Company will provide outlook and guidance at Investor Day on March 1st, 2017.
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
