3 ways McDonald's Corp. is winning new customers
Shares of McDonald's (NYSE: MCD) have risen nearly 30% over the past 12 months, thanks to clever turnaround strategies engineered by CEO Steve Easterbrook, who succeeded Don Thompson last March. Those fresh tactics helped McDonald's beat sales and earnings estimates for four quarters in a row.
During the third quarter of 2015, McDonald's comparable store sales in the U.S. turned positive for the first time in two years. Global comparable store sales subsequently rose 5% during the fourth quarter, and another 6.2% during the first quarter of 2016.
These numbers suggest that McDonald's faces much brighter days ahead. Bears claim that the stock has become overvalued at 25 times earnings, which is much higher than the industry average of 15 for restaurant stocks -- but some bulls claim that the company's new strategies could keep generating higher sales in the future.
Let's take a look at three such strategies, and how they might drive more customers to the Golden Arches.
1. All-day breakfast... worldwide
McDonald's U.S. comps rose 5.4% last quarter, compared to 5.7% growth in the first quarter and a 2.6% decline in the prior year quarter. Most of that turnaround was attributed to the introduction of all-day breakfast nationwide. During last quarter's conference call (as transcribed by Thomson Reuters), Easterbrook stated that "all-day breakfast fills a price gap on the menu, and customers are responding by trading up or adding all-day breakfast items to their orders."
McDonald's plans to use the same strategy to boost sales worldwide -- it already launched all-day breakfast in Australia last quarter, which Easterbrook calls "a testament to our ability to move winning plays quickly between markets".
The introduction of all-day breakfast has likely hurt Jack in the Box (NASDAQ: JACK), which previously dominated the niche for all-day breakfast in certain markets. Jack in the Box's namesake chain only posted 1.4% comps growth during its first quarter, down from 6.2% growth in the fourth quarter and 7.3% growth in the third. McDonald's strategy also inspired other restaurants, including one of Restaurant Brands International's Burger King franchisees, to test out all-day breakfast items.
2. Make your own value meal
Another key growth driver for the U.S. market is the "McPick 2" value menu platform. McDonald's has been testing two versions of the platform since the beginning of the year -- one which features two items for $2, and another which features two items for $5. Easterbrook states that rotating two price tiers gives the company "added flexibility at both national and local levels."
CFO Kevin Ozan also noted during the call that the McPick 2 platform will "offer compelling value at different points, different times a year, and maybe slightly different offers in different parts of the country -- depending on the consumer set."
3. The "McDonald's of the future"
McDonald's has also been trying to boost store traffic with high-tech solutions through its "Experience of the Future" initiative. These solutions -- which have been tested in select markets in the western U.S., Australia, and the U.K. -- include self-serve kiosks and table-mounted tablets for ordering, as well as table-side service for cooked-to-order burgers.
McDonald's new mobile app, which has been downloaded over 10 million times since its launch last year, is also helping it catch up to more tech savvy chains like Starbucks (NASDAQ: SBUX) and Domino's Pizza (NYSE: DPZ). Almost a quarter of Starbucks' U.S. orders now come from its mobile app, while over half of Domino's U.S. sales come from digital channels. The combination of mobile app ordering and self-ordering kiosks should boost operating efficiency while reducing wait times at McDonald's locations.
But is McDonald's worth buying today?
McDonald's has gotten some of its mojo back under Easterbrook, but I don't think it's a great buy at current prices. Analysts currently expect McDonald's earnings to grow 11% annually over the next five years, which gives it a 5-year PEG ratio of 2.2. That compares poorly against the projected growth rate of 14.5% for the restaurant industry, which has a lower average PEG ratio of 2.1.
Therefore, I believe there's too much optimism priced into McDonald's shares today, and investors should brace for a big pullback if the company fails to meet rising expectations over the next few quarters. But if that pullback happens, it might be a good time to pick up some shares at more reasonable prices.
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