McDonald’s Earnings Preview Shows It Isn’t Out of the Woods Yet

McDonald’s (NYSE:MCD) surprised investors last week with a mid-quarter sales update that packed a few pieces of good news into one announcement. The fast-food giant is back to growing revenue at existing locations in the U.S. market, management said, and in other major economies like Japan and Australia. Mickey D’s also took the opportunity to boost its quarterly dividend payout to $1.29 per share.

But the report also contained signs that the business is still struggling with the impact of the coronavirus pandemic, which could pressure investor returns at least through 2021.

Let’s take a closer look at this preview of third-quarter earnings.

Young adults sharing a fast-food meal.

Image source: Getty Images.

Getting back to growth

McDonald’s achieved a strong growth rebound over the last few months in the U.S. market, with comparable-store sales rising by 4.6% year over year. That metric had shown an 8.7% year-over-year decline in the fiscal second quarter and had hit double-digit losses during the peak store-closure months in the spring and early summer.

The chain is still shrinking in major international geographies, including most of Europe, Latin America, and China. Globally, comps were down 2.2% in the third quarter compared with a 24% slump in Q2. Management cited McDonald’s dominant drive-thru presence and growing delivery platform for powering most of the gains.

Reading between the lines

There was some bad news in the update, too. McDonald’s noted that customer traffic is still down in the U.S., meaning growth was driven entirely by higher average spending. The chain had been struggling on this score even before the pandemic struck, and pandemic-related changes to consumer habits appear set to pressure breakfast traffic well into 2021.

The dividend increase was welcome news, but at 3%, the hike was significantly weaker than in 2019 (8%) and 2018 (15%).

The bigger concern was only hinted at in this report, and that’s the fact that McDonald’s had to ramp up advertising to get sales moving in the right direction again. Management said last quarter that it was planning a huge marketing push after pausing during COVID-19 lockdowns. That promotion plan started in Q3 and obviously succeeded in drawing more traffic to stores and higher home delivery volume. We don’t know yet how much profitability the company had to sacrifice, though.

More updates are on the way

Investors will be focused on that operating-margin number when McDonald’s announces its full results on Nov. 9. The metric recently dipped below 40% of sales but has been a key casualty of the COVID-19 pandemic.

MCD Operating Margin (TTM) Chart

MCD Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.

Rival Starbucks posts its results in the interim, too, and it will be interesting to see whether it notched similarly big gains in the U.S. while spending freely on advertising and menu pricing to try to win back more traffic during the early morning hours.

Until those reports come out, investors should be happy about McDonald’s expanding sales pace in the U.S. and the improved demand trends it is seeming in all of its markets. Those successes should help it establish momentum ahead of what could be a difficult 2021 for the restaurant industry.

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