McDonald’s Corporation (MCD) is expanding its All Day Breakfast menu come September so that customers can order biscuits, McMuffins and McGriddles at every location nationwide. This is good news for customers, but what effect does it have on MCD stock?
Since the introduction of its all-day breakfast initiative last October, most customers received McMuffin sandwiches on English muffins while those in the Southeast got biscuit sandwiches instead.
Customers weren’t given a choice. Now they are. McGriddles, which McDonald’s has been testing in various parts of the country over the last few months, were also not part of the original rollout.
McDonald’s has bet large that its all-day breakfast will continue to be the fast-food giant’s salvation. The question for investors is whether it’s enough to keep the company growing long-term.
What All-Day Breakfast Does for MCD Stock
It’s essentially making a Big Mac-sized bet that its all-day breakfast menu, which completely altered the way the Golden Arches treated its dayparts, will do even better with these changes to the menu.
All-day breakfast’s initial impact on sales has been profound. In Q4 2015, its U.S. same-store sales increased 5.7% year-over-year, its best quarterly growth in four years. In the first quarter of fiscal 2016, which ended March 31, McDonald’s U.S. restaurants delivered a 5.4% increase against the backdrop of a 2.6% decrease in Q1 2015.
Clearly, the initial results have been pleasing to both the company and investors alike.
“Breakfast fills a price gap on the menu. And customers are responding by trading up or adding All Day Breakfast items to their orders,” said McDonald’s CEO Stephen Easterbrook in the Q1 2016 conference call. “Whilst we’re no longer in the launch phase, this platform remains a significant contributor to top-line results.”
Investors who bought MCD stock on Oct. 5, 2015, the day before launching its all-day breakfast initiative, have been privy to a 22.7% return in just eight months compared to a 7.4% return for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) over the same period.
McDonald’s executives are quick to point out that while all-day breakfast is a big part of its recent success, it’s well aware that it has to do more in order to maintain momentum. Whether that’s by simplifying its menu to make ordering easier and quicker or presenting value propositions to its customers such as the McPick 2, where you get two items for $2, management understands that long-term success for MCD stock happens when all its dayparts are performing well.
“One of the very reassuring elements of All Day Breakfast was that whilst we clearly added incremental visits and incremental spends across rest of the day, our breakfast business has also prospered as well,” Easterbrook’s response to a Q1 2016 conference call question about the performance of its various dayparts in the U.S.
Internationally, McDonald’s business is performing quite well with Q1 2016 results showing good growth on the top- and bottom-line with reasonable same-store sales growth. With the company in the final stages of solidifying bids for the 20-year franchise rights in China and Hong Kong — rights could fetch $2 billion — its overseas business continues to become a bigger part of its global enterprise.
The fly in the ointment for MCD stock is right here in the U.S., where despite good same-store sales growth, its U.S. margins at its company-operated locations declined by 110 basis points to 14.2% in the first quarter. Easterbrook feels its turnaround is still ongoing, but that margins will improve with further same-store sales growth at its U.S. restaurants.
Do you give him the benefit of the doubt? I think you do. After all, it was him who pulled the trigger on all-day breakfast and without that, we probably wouldn’t be having this conversation.
For me, this news suggests Easterbrook is listening to his customers. Investors place your bets.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
