McDonald's Corporation MCD is benefiting from loyalty programs, strategic marketing and digital initiatives, and menu innovations. Shares of MCD have gained 5.2% over the past three months compared with the Zacks Retail - Restaurants industry’s growth of 3.4%.
McDonald's reported impressive fourth-quarter 2022 results wherein earnings and revenues surpassed the Zacks Consensus Estimate by 5.3% and 3.9%, respectively.
However, earnings estimates for 2023 have moved south to $10.49 per share from $10.53 over the past 60 days, depicting analysts' concern over MCD’s growth prospects. The company’s growth is being hurt by a softening economy and COVID-related woes in China along with inflation and macroeconomic risks.
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Let’s delve deeper and analyze the factors.
Tailwinds
McDonald’s is the world’s largest chain of fast-food restaurants, with presence in more than 100 countries. Its offerings have reached the billion-dollar brand status through sustained product innovation and geographic expansion.
McDonald's is benefiting from its loyalty programs as these helped the company to transform its offerings across drive-thru, takeaway, delivery, curbside pick-up and dine-in. The company has already introduced a loyalty program in more than 50 markets, including the United States, Germany, Canada, U.K., Australia and France, with almost 50 million loyalty users as of Dec 31 2022.
MCD emphasizes on improving its chicken platform, including McNuggets, McChicken, McCrispy and McSpicy. It believes that the strengthening of the core menu and solid marketing are likely to pave the path for additional growth in the upcoming periods.
McDonald’s is consistently trying to improve its performance in the International Operated Markets, including Australia, Canada, France, Germany and the U.K. The company intends to drive comps growth in these markets through the introduction of value meals, customization of the menu to suit local customers’ tastes, reimaging of restaurants, efficient marketing and promotions, improved service and increased convenience via delivery and digitalized presence. With the rollout of self-order kiosks, digital menu boards, table service and the mobile app, customers now have more choices and flexibility as the company progresses toward its Experience of the Future initiative, which is based on adding technology to its eateries. The company reinstated the Performance and Customer Excellence program in 2022, after suspending it during the pandemic, in its 30 markets to enhance customer experience on a daily basis.
Headwinds
Although overall comps of MCD have increased sharply, it is still far behind the pre-pandemic level in a few markets, especially China. In fourth-quarter 2022, comps in the China market were negative. Softening economy and COVID-related government restrictions hurt comps in China.
McDonald’s is grappling with difficulties like decelerating growth in Asia along with weakness in some parts of Europe, where the economic/political conditions are expected to be further challenging. During the second quarter of 2022, the company announced its exit from the Russian market owing to geopolitical tensions. Also, it cited concerns about a challenging operating environment due to rising inflation, a surge in COVID-19 cases and the return of government restrictions in many markets, which exacerbated labor shortages and supply chain challenges.
MCD’s margins are hurt by persisting inflationary pressures. Margins in fourth-quarter 2022 suffered due to significant levels of food and energy inflation in Europe. The company stated that rising inflation levels are contributing to weak consumer sentiment worldwide and that the possibility of a global recession cannot be ruled out. The company expects to witness food and paper inflation in 2023 in mid-to-high single digits.
Zacks Rank & Key Picks
MCD currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Here are some top-ranked stocks that investors may consider in the Zacks Retail-Wholesale sector.
Tecnoglass Inc. TGLS flaunts a Zacks Rank #1 at present. TGLS delivered a trailing four-quarter earnings surprise of 21.5%, on average. Shares of the company have gained 86.7% in the past six months.
The Zacks Consensus Estimate for TGLS’s 2023 sales and EPS suggests growth of 13.4% and 15.4%, respectively, from the year-ago period’s reported levels.
Chuy's Holdings, Inc. CHUY currently sports a Zacks Rank #1. CHUY delivered a trailing four-quarter earnings surprise of 19.1%, on average. Shares of CHUY have risen 44.3% in the past six months.
The Zacks Consensus Estimate for CHUY’s 2023 sales and EPS suggests growth of 10.8% and 19%, respectively, from the year-ago period’s reported levels.
The Kroger Co. KR currently sports a Zacks Rank #1. KR delivered a trailing four-quarter earnings surprise of 9.8%, on average. The stock has gained 6.2% in the past six months.
The Zacks Consensus Estimate for KR’s fiscal 2024 sales and EPS suggests growth of 2.5% and 6.6%, respectively, from the year-ago period’s reported levels.
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