On McDonald’s (NYSE: MCD) fourth-quarter earnings call, CEO Chris Kempczinski talked about the company’s growth pillars, using a “MCDs” acronym. The “M” stands for maximizing marketing, the “C” stands for a commitment to the core menu, and the “D” stands for “doubling down on digital, delivery, and drive-thru.”
The fast-food giant’s marketing has been on point; the September 2020 Travis Scott promotion demonstrated McDonald’s marketing savvy. Ditto for the commitment to the core menu – McDonald’s is putting new items on its menu in 2021 including spicy Chicken McNuggets, a new chicken sandwich, and new McCafe items.
The “M” and the “C” are crucial components of McDonald’s long-term strategy, but the “D” might be the biggest difference-maker.
On the Q4 call, Kempczinski spoke on each of the three “Ds.”
- “Digital sales exceeded $10 billion or nearly 20% of systemwide sales in 2020, across our top six markets.”
- “In the past four years, McDonald's has expanded the number of restaurants offering delivery to nearly 30,000.”
- “With over 25,000 drive-thrus around the world… We've reduced service times each of the past two years, even as a greater percentage of customers went through our drive-thrus during 2020.”
Last week, reports surfaced that McDonald’s is cutting out the fat – no pun intended – and further focusing on the three Ds.
McDonald’s is Closing Hundreds of its Walmart Locations
McDonald’s has enjoyed a long-term partnership with Walmart, placing its restaurants inside Walmart (NYSE: WMT) locations. At its peak, McDonald’s had around 1,000 of these restaurants. Granted, that is less than 3% of McDonald’s total number of restaurants, but still, this was not an inconsequential partnership.
The fast-food giant will keep around 150 restaurants inside Walmart stores, so the partnership isn’t getting completely severed, but that’s a small fraction of what it used to be.
You may be wondering: why is McDonald’s doing this?
With food delivery and drive-thru increasing in popularity and in-store shopping decreasing in popularity, McDonald’s wasn’t making enough money from its Walmart locations.
Okay, but sales will surely rebound when we return to normal, right?
Probably not. For a few reasons:
- Delivery and drive-thru are going to be a top option for customers in a post-COVID world.
- Many customers have fallen in love with curbside pickup; they aren’t just doing it to protect themselves from the virus.
- Walmart is building up its e-commerce presence, which will lead to less in-person shopping.
All in all, it appears that McDonald’s is making the right decision by shutting down these locations.
McDonald’s is Set for 2021 Recovery
The 2020 fiscal year was a tough one for McDonald’s. Revenue dipped by 10% and global comps were down 7.7%. But in 2021, analysts expect McDonald’s to see 15% revenue growth and add to its store count.
McDonald’s gave investors reason for optimism when it recorded growth in its breakfast segment in October. But cold weather and peaking coronavirus cases in November/December threatened to put a big dent in sales.
That didn’t end up being the case, however, as McDonald’s US sales increased in “all major dayparts, including breakfast” in the fourth quarter. With millions of Americans being vaccinated every week, the weather getting warmer, and people potentially returning to the office in the near future, breakfast sales could surge in the coming months.
The Price is Right
McDonald’s shares are changing hands at 27.5x forward earnings. That’s a reasonable valuation for a company that could both grow comps and expand over the next 3-5 years.
The 2.19% dividend yield is also appetizing. That is still higher than the 10-year Treasury yield – even after the recent Treasury sell-off.
How Should You Play McDonald’s?
It’s easy to overlook McDonald’s in favor of high-flying growth stocks, but shares offer a high floor and a medium ceiling. That’s hard to find in a frothy market.
Shares have been basing between around $202 and $233 over the past eight months. They are currently consolidating at the upper end of that range, potentially forming the “handle” of a cup and handle pattern.
If McDonald’s clears $234 on high volume, you may want to pick up some shares.
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