Why McDonald’s execution looks as strong as ever

McDonald’s (NYSE:MCD) implemented a new plan under CEO Chris Kempczinski, focusing on digital ordering, drive-thru and delivery. The fast-food giant just wrapped up a strong year with double-digit comparable sales growth and looks well positioned for future growth.

In this music video for “Beat and Raise”, recorded on January 28dork contributors Jeremy Bowman and Brian Withers discuss McDonald’s last quarter and how the company is weathering the pandemic.

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Brian Wither: I went to McDonald’s the other day. I went there on Monday and said, “Can I have a large fry, please?” She said, “No, we don’t have large fry containers.” I wonder if the supply chain has had an impact on the McDonald’s neighborhood.

Jeremy Bowman: Provision [laughs] the channel really hits home when they tell you that. Guess they could still do a medium fry or anything big.

Withers: She said, “Sorry, we have to sell you a medium.” I’m like it’s probably best for me anyway. [laughs]

Archer: Yeah. Let’s go. McDonald’s therefore had a good quarter. Let me show the slides. I think McDonald’s is one of those stocks you can set and forget. It is the largest restaurant chain in the world. It’s a brand known around the world, and a pretty strong quarter they were running – 2020 was a pretty weak year for them globally due to the COVID pandemic.

Withers: Slow down to full screen over there, Jeremy.

Archer: You’ll see revenue up 13% to $6 billion, which was basically in line with the estimates. It’s pretty good when you’re a company the size of McDonald’s and growing in double digits. Like I said, they’re having an easy year. Nevertheless, I think we have to be content with it. It’s also worth noting McDonald’s, they franchise 93% of their restaurants, so revenues don’t really reflect the true size of the business. Their system-wide sales, I think we’re like $118 billion or something last year. Yearly revenue is only about 20% of that or something, and then earnings per share went up 31%, which I think is also pretty stellar for this type of business. It was a bit below estimates though, at $2.34 they didn’t really give any guidance or detailed outlook.

As Brian it seems like you’ve experienced them firsthand they have headwinds with supply chain challenges, labor shortages, inflation and all that good things. They didn’t give guidance on revenue or EPS, but they saw an operating margin in the low to mid-40s, few companies are moving up there, which shows how badly their model franchise has been strong for them, at least in terms of profitability and that was around 40% for 2021, so they’re improving, which is a good sign. Highlights in the fourth quarter, comparable store sales grew 12.3% globally, which is exceptional and that’s on a two-year rate or a two-year stack as they call it, 10, 8%, so a bit slower because they dipped in the quarter of a year ago.

That’s solid growth and then 7.5% in the United States, which is actually overtaking, I think it was, 5.5% growth a year ago, so growth definitely strong at all levels. Digital sales has been a big initiative as it has been across the entire restaurant industry during the pandemic. Twenty-five percent of their business comes from digital sales in their top six markets. I think it’s pretty impressive how they’re remaking themselves on the digital front following in the footsteps Starbucks and those kind of restaurants that have clearly done a good job with that too. Their digital sales were $18 billion system-wide for the full year so a pretty big company there and their rewards program has made progress there with my McDonald’s rewards now 30 million members in the United States six months after launch.

Withers: It’s a fantastic number. I don’t know if Starbucks is at 30 million at this point.

Archer: Yeah. You might be right. Yeah they really show the demand that was there for them and I think that should also be a pretty easy program to expand internationally, build that competitive edge that you can have when you’re a big brand with McDonald’s like with a rewards program like this and then not really any major worries but the company mentioned because the COVID uncertainty we’re going through this omicron variant and there are supply shortages, shutdowns in other countries. They saw stronger COVID headwinds internationally, less in the United States, certainly like China and parts of Europe, and then inflation in wages and product costs hit them, but they are a bit more immune to this than other restaurant chains due to their franchise model, so overall a pretty solid report. I think the stock they announced yesterday, the stock barely moved, and they were up today with the general market gains. Like I said, I think this is one of those stable performers if you’re just looking for a safe stock you can rely on. They are also a dividend aristocrat with, I think, a 2.5% yield.

Withers: It’s quite impressive. Yeah, I found the Starbucks loyalty number. Their 90-day active members are just under 25 million, so that might not be a comparison to McDonald’s 30 million members, but if you’re using the app and it’s been successful for you, it Seems like they’re repeating business through this, so that’s super awesome.

Archer: This is a good customer acquisition tactic for sure.

Brian Withers has no position in the stocks mentioned. Jeremy Bowman owns Starbucks. The Motley Fool owns and recommends Starbucks. The Motley Fool recommends the following options: Short Calls $115 in January 2022 on Starbucks. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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