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McDonald's (NYSE: MCD) has treated investors to market-thumping growth in its last few quarterly reports. And those gains have combined with surging profitability to send earnings far higher.
Yet shareholders saw evidence of a slowdown when the fast-food giant kicked off its fiscal 2018 in a late April report. That potential shift raises the stakes around Mickey's D's second-quarter report, due out before the market opens on Thursday, July 26.
Let's take a closer look.
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Growth trends
Comparable-store sales held steady at an industry-leading 5.5% last quarter, which kept McDonald's well ahead of rivals including Starbucks, Yum! Brands, and Dunkin' Brands. Management credited improvements to the menu, aggressive pricing, and faster service for powering the company's 11th consecutive quarter of positive comps. "More customers are recognizing that we are becoming a better McDonald's, appreciating our great tasting food, fast and friendly service, and compelling value," CEO Steve Easterbrook said .
Traffic change by fiscal year. Data source: McDonald's. Chart by author.
However, while customer traffic trends were positive on a global basis, they slipped into negative territory in the key U.S. market. All of its peers are struggling with the same challenge, but the restaurant chain is still hoping to get back to growth with help from menu innovations like the national rollout of its fresh-beef Quarter Pounder. On Thursday, we'll find out if these traffic-boosting initiatives worked, or if McDonald's trends were again pinched by the negative trends in the broader fast-food industry.
Profit margin
Mickey D's has been aggressively whittling down the proportion of restaurants that it operates in favor of relying more heavily on franchising. Its company-owned locations stood at just 8% last quarter compared to 15% in the year-ago period.
The refranchising move has pushed overall revenue lower while lifting profits as McDonald's trades low-margin food sales for high-margin rent, royalties, and franchise fees. As a result, operating margin has shot up to 41% of sales from 31% just a year ago. Investors are looking for more gains on this score, but at a slightly slower pace than in recent quarters.
By 2019, in fact, management is targeting operating margin in the mid-40% range, which should support its annual earnings growth target in the range of 7% to 9%. McDonald's is aiming to get its company-owned restaurant proportion down to about 5% over the long term, and it will likely announce more progress along those lines this week.