McDonald’s (MCD 0.20%) investors are in for a volatile trading week ahead. The fast-food titan will announce its fiscal second-quarter results on Tuesday, July 26, and there are some big questions heading into that report.
The chain likely endured accelerating cost spikes due to inflation. Growth may have slowed in a few key markets around Europe and North America. But the broader outlook remains bright for Mickey D’s, both in terms of sales and investor returns.
Let’s take a closer look.
1. Sales trends
Most investors who follow the stock are looking for sales to fall by less than 1% to around $6 billion. But there are many moving pieces within that revenue figure, including exchange rate shifts and the temporary impact of store closures in Russia.
That’s why it’s helpful to follow comparable-store sales, which strip out the impact from currency moves. That metric has been impressive lately, with comps rising about 12% in recent quarters. While the U.S. market has been slowing, rebounds in other parts of McDonald’s business have helped it dramatically expand its selling footprint.
CEO Chris Kempczinski described “broad-based momentum across all segments” in the chain’s late April announcement, and shareholders are hoping that they’ll hear similarly bullish comments in late July. Watch customer traffic for signs that McDonald’s is still attracting more visitors even as prices edge higher for many of its menu items.
2. Costs and cash
McDonald’s isn’t immune to the many cost pressures impacting restaurants today. Wages are rising, inputs are more expensive, and transportation expenses are soaring. Rival Starbucks, for example, revealed that operating profit margin fell to 12.4% of sales last quarter from 14.8% a year earlier, even though global revenue jumped 15%.
MCD Operating Margin (TTM) data by YCharts
McDonald’s has a brighter profitability outlook, in part because of its lucrative franchising fees. But the chain also enjoys a big competitive advantage in its thriving drive-thru business. Starbucks and other peers are all trying to push into that space now that consumers are favoring on-the-go food. Look for McDonald’s to capitalize on its premium positioning by posting operating profit of at least 40% of sales.
3. Risks and outlook
Kempczinski and his team back in April described mounting threats to McDonald’s sales trends, including the war in Ukraine, pandemic lockdowns in China, and slowing economic growth in the U.S. These factors might have pressured the business in Q2, potentially by slowing sales gains.
But investors should try to ignore short-term swings and focus instead on metrics like market share, cash flow, and profitability. The chain’s dominant position in the fast-food space gives it enduring assets it can use against rivals like Starbucks, Domino’s, and others.
Its industry-leading profit margin provides resources that management can direct back into the business while still spending on higher dividends, which have risen in each of the last 46 years.
That rising income, plus McDonald’s proven ability to generate higher cash flow through a wide range of selling conditions, makes it a compelling stock investment to consider for 2022.
Demitri Kalogeropoulos has positions in McDonald’s and Starbucks. The Motley Fool has positions in and recommends Domino’s Pizza and Starbucks. The Motley Fool recommends the following options: short July 2022 $85 calls on Starbucks. The Motley Fool has a disclosure policy.
