Earnings Report Preview | Introducing a New Revenue-Boosting Plan After Price Increases, Can McDonald's Not "Win"?

Zhitong App has learned that McDonald's will announce its fourth-quarter financial results before the opening of the US stock market on Monday. Analysts expect its revenue and earnings per share to increase by nearly 9% YoY, reaching $6.45 billion and $2.83 respectively. McDonald's has only had one instance of earnings per share below expectations in the past eight quarters, while revenue fell short twice. At the same time, McDonald's has also withdrawn its plan to upgrade its "Best Burger," but it remains to be seen whether sales will be boosted.

McDonald's US same-store sales may face pressure

Investors will closely monitor the elasticity of McDonald's US sales, as menu prices tend to be moderate in a low inflation environment. They will also pay attention to the performance of this chain restaurant in international markets this quarter, especially as CEO Chris Kempczinski stated that some markets outside the Middle East have been affected by the conflict between Israel and Hamas. Baird analyst David Tarantino has lowered his earnings per share expectations for McDonald's in the fourth quarter, 2024, and next year by less than 1% to account for the potential drag on McDonald's development license market division related to the Middle East conflict.

McDonald's has outperformed its competitors in recent quarters, thanks to price increases on its menu and high-income customers turning to the fast-food giant. However, the decrease in low-income diners visiting McDonald's has led to a decline in foot traffic in the third quarter. Analysts estimate that its same-store sales will grow by 4.79%, with US same-store sales increasing by only 4.45%. This is significantly behind the 8.1% growth in same-store sales in the third quarter.

McDonald's and its competitors will face pressure to increase foot traffic this year. Diners will be squeezed by double-digit price increases, while last year's price increases drove sales growth. On the contrary, the pressure that chain restaurants currently face is to convince customers that their food and beverages are worth the price and to encourage them to visit more frequently.

Analysts remain optimistic about McDonald's prospects

Nevertheless, considering the dominant position of this Chicago-based burger chain in the fast-food market, customer loyalty, diversified sources of revenue, and continuous innovation, some analysts are optimistic about the company. HSBC has listed McDonald's as one of the most worthwhile restaurant stocks to hold this year. Analyst Meredith Prichard Jensen stated that McDonald's unparalleled global footprint provides it with a strong structural advantage in its ability to build at an unparalleled speed.

In early October, the company's revenue and profit data showed resilience in the face of a challenging economic environment. Tarantino added, "We expect the remaining business to perform well in the fourth quarter, and we are confident that McDonald's will demonstrate stable overall operational momentum in 2024, especially once the company gets past the difficult Q1 comparison." Wall Street analysts have a "buy" rating on the stock, while Seeking Alpha's quantitative rating is more cautious, considering it a "hold". Since the announcement of third-quarter earnings, the stock has risen nearly 15%. Over the past year, McDonald's stock has risen 13%, lower than the S&P 500 index's 20% increase.

In 2023, fast food stocks suffered a heavy blow due to concerns about weak consumer confidence, rising prices of beef and other food products (due to insufficient beef supply, prices may not improve quickly), and the potential impact of weight loss drugs. However, Wall Street seems to believe that "hamburgers" are still unstoppable. Wedbush analyst Nick Setyan wrote in a client report, "In any consumer environment, McDonald's is hard to 'lose'." He predicts that same-store sales will continue to grow in the short term, driven by menu pricing and innovation, loyalty programs, effective marketing, operational execution, and efficiency.

Jefferies analyst Andy Barish lists the stock as his top pick for 2024, calling it the "best defensive and offensive stock in the restaurant industry" with "resilience in uncertain or weak macro (environment)". Barish expects the chain to further invest in digital, delivery, McDelivery, and chicken products. And as employees gradually return to the office, the chain seems to be attracting breakfast customers again. Between 7 a.m. and 10 a.m. Eastern Time in 2023, store visits accounted for 16.7%, higher than 15.9% in 2022, but still lower than 18% in 2019.

Will the "Best Burger" plan work?

McDonald's has launched the "Best Burger" plan: making subtle adjustments to the chain's burgers to create a noticeably tastier product. Mason Smoot, McDonald's Chief Restaurant Officer in the United States, said at a media event on Monday, "Our goal is to improve the quality, flavor, and overall dining experience of our core burgers, but we want to stay true to the taste that everyone loves."

McDonald's did not change the beef patty itself, but rather the cooking and assembly process. The griddle gives the patty more breathing space during cooking. To enhance the flavor, only six patties are cooked at a time, instead of the previous eight. Onions are also added before the patty is cooked, allowing them to absorb the juices from the patty. The cooked patty stays hotter, so when the burger is delivered to the customer's hand, the entire burger is still hot. The cheese melts better, the bun is upgraded, and the special sauce for the Big Mac is increased. Mark Kalinowski, CEO and analyst of Kalinowski Stock Research, said, "This is a step in the right direction towards improving some core products while maintaining its essence."

McDonald's began rolling out these tastier burgers about a year ago, but eventually launched them nationwide in the United States. Some of the company's most important international markets, such as Australia and Canada, have already implemented the "Best Burger" program. Kalinowski noted that Australia and Canada have outperformed some of McDonald's other major international markets, which can be partially attributed to the burger improvements.

At McDonald's Investor Day in December of last year, Kempczinski stated that by the end of 2023, the "Best Burger" is expected to be available in 70 markets. By the end of 2026, the company anticipates that almost all markets will offer upgraded burgers. He told investors, "Through initiatives like 'Best Burger,' we are making incremental changes that, when accumulated, make a significant difference, and our customers are really noticing."

These changes affect all McDonald's burgers except for the Quarter Pounder. The fast-food giant had already revamped its core menu items in 2018, switching from frozen beef patties to fresh beef. This change resulted in McDonald's gaining market share in the burger category for the first time in five years.

However, Wall Street has differing opinions on whether the "Best Burger" can drive significant growth.

In a research report last month, Wells Fargo analyst Zachary Fadem listed the "Best Burger" as McDonald's "upside catalyst" for 2024. However, it is still unclear how much improvement the company hopes to see from this initiative. Kempczinski estimates that these changes could increase total sales by 0.5% in 2024. Kalinowski said, "I do think it will have a positive net effect, but it's somewhat small."

Others remain skeptical. BTIG analyst Peter Saleh stated, "I'm skeptical that this will drive traffic. I think it's part of an ongoing process to elevate the game. Over time, many of these concepts have to improve the quality of the food."

But there are early signs that consumers are eager to try the improved burgers themselves. Loop Capital analyst Alton Stump wrote in a report to clients in May, "Although advertising at the local level only started this week, our contacts indicate that the 'Best Burger' burger transactions have increased an average of 10% so far."