After years of sluggish growth, McDonald’s Corporation (NYSE:MCD) is finding its groove again. And the fast food chain has newly appointed CEO Steve Easterbrook to thank for that. Last May, Easterbrook unveiled a turnaround plan to get sales back on track. Since that time, MCD stock has skyrocketed about 30%, and if all goes according to plan, the stock still has room to run higher.
Last week, McDonald’s reported first-quarter earnings and the company completely demolished analyst forecasts. McDonald’s reported earnings of $1.23 a share, which is a whopping increase of 46% from the same period a year ago. (Source: “McDonald’s Reports First Quarter 2016 Results,” McDonald’s Corporation, April 25, 2016.) Analysts were expecting earnings per share of $1.16.
Revenue was down one percent from the previous year, but that still beat analyst expectations. McDonald’s reported revenue of $5.9 billion against analyst forecasts of $5.81 billion. When you adjust for currency fluctuation, McDonald’s revenue growth actually increased three percent. Same-store sales grew an impressive 6.2%, topping analyst expectations of 4.5% growth.
McDonald’s seems to be firing on all cylinders. But what’s driving sales? Here’s a look at a couple of catalysts that should continue to be a boon for MCD stock.
When McDonald’s introduced an all-day breakfast menu in October in response to customer requests, it was the biggest menu change in years. Analysts didn’t think much of the change, and some even thought that demand for breakfast items after lunch would wane.
But so far it’s proving to be a hit with customers. McDonald’s said that in the U.S., the first-quarter same-store sales increase of 5.4% was largely the result of the popularity of the all-day breakfast menu.
It’s also helping to bring in a crop of new customers. According to market research firm NPD Group, in the first two months since the launch of the all-day breakfast, one-third of customers who purchased breakfast items in non-traditional hours were new customers. (Source: “For McDonalds, All-Day Breakfast & Improved Performance in Asia Take Stock To All-Time High,” Forbes, January 29, 2016.)
In the company’s fourth quarter, earnings showed that its turnaround strategy was taking hold. All-day breakfast helped power the company to an increase in global same-store sales of five percent over the previous year. U.S same-store sales saw even better numbers, growing 5.7% in the same period. (Source: “McDonald’s Reports Fourth Quarter And Full Year 2015 Results,” McDonald’s Corporation, January 25, 2016.) In the third quarter, same-store sales increased for the first time in two years.
All-day breakfast has been a success for McDonald’s and it should be a major catalyst for MCD stock going forward.
Expansion in Asia
McDonald’s is targeting Asia as the next frontier for growth. The fast food giant recently announced that it wants to open more than 1,500 new restaurants in China, Hong Kong, and South Korea over the next five years. (Source: “McDonald’s Wants to Open More Than 1,000 New Restaurants in China,” Fortune, March 31, 2016.)
McDonald’s already has about 2,800 restaurants in the region, but the focus of the new plan is mainly China. McDonald’s wants to open more than 1,000 restaurants in China, on top of the current 2,200.
China is currently McDonald’s third-largest market, behind the U.S. and Japan, but the company hopes to make China the company’s second-largest market. And it should have no problem achieving that soon as China is leading McDonald’s “high-growth” business segment. The high-growth segment’s first-quarter same-store sales increased 3.6%.
Easterbrook recently said that the company is betting on continued population growth and increasing urbanization rates to drive sales in China even as the economy slows. (Source: “McDonald’s Plans to Add More Than 1,000 Restaurants in China,” The Wall Street Journal, April 4, 2016.)
Look for China to be another growth catalyst for MCD stock over the next few years.
The Bottom Line on MCD Stock
For a company that has struggled for years as it lost its touch with customers, the most recent quarter is a major victory for McDonald’s. It proves that the company’s turnaround plan is working. With the all-day breakfast driving much of that success and expansion into China coming along, MCD stock should have no problem keeping its upward trend.