Just before the first quarter came to a close, analysts at Credit Suisse raised their price target for McDonald’s Corporation (MCD) to $135 a share from $130 a share, all because they said they said their research showed that MCD would post better-than-expected same-store sales growth.
Well, they were technically right.
MCD reported its first-quarter financial figure before the market opened this morning, and global same-store sales grew by 6.2%. In the U.S., from where Credit Suisse analysts got their cue, same-store sales grew by 5.4%.
Credit Suisse had raised its expectation in the U.S. from 3.8% to 4.5%.
Helped by the better-than-expected same store sales data, EPS clocked in at $1.23, a 46% increase over the prior-year same-quarter figure. Consensus analyst expectation was that MCD would post EPS of $1.16, which was the exact EPS Credit Suisse analysts also forecasted.
As I highlighted in a commentary on Credit Suisse’s expectations for McDonald’s Q1 earnings, the latest financial figures from MCD stock further confirm that its recovery strategy is really working.
Other than the earnings beat, here are two other things that should matter to investors
MCD’s All-Day Breakfast Effect Isn’t Dying Down
I know McDonald’s move to launch the all-day breakfast initiative has already been discussed sufficiently. So what’s there to know about it, really?
First, this is the third consecutive quarter that MCD is posting same-store sales growth. And management keeps on saying this was partly down to the growing popularity of all-day breakfast in the U.S. The other parts include other value offerings, like the McPick 2.
You’ll recall that this three-quarter streak of positive comparable store growth comes after a seven-quarter streak of same-store sales decline.
So the fact that the influence of the all-day breakfast is still high three quarters after the intuitive was launched shows that it’s not a fluke.
But these restaurants dismissed claims that the all-day breakfast helped MCD steal business from them. Instead, they accused bundled promotions from McDonald’s, Wendys Co (WEN) and Restaurant Brands International Inc‘s (QSR) Burger King.
But now that MCD has stopped the bundled promo — which was, by the way, confusing as franchisees offered whatever they wanted and at their own chosen price — it was always important to see what would happen to sales.
In essence, that sales came in impressive despite the confusion with its bundled promotion is proof that the all-day breakfast is continuing to be a success.
Although, the importance of the all-day breakfast initiative to MCD stock means that investors need to monitor what moves its competitors make that could threaten that.
Japan Division Is Recovering
At the beginning of the year, MCD said its Japan division would return to full-year profitability in 2016. If achieved, this would be the first in three years that its Japan division would write its earnings with blue ink.
The struggles in Japan come from a series of food quality scandals that hit it in the country.
Management said in the latest earnings release that its Foundational Markets (you can find what the MCD classify as Foundational Markets here) recorded a first-quarter same-store sales growth of 11% — “primarily due to sales recovery in Japan.”
There are two reasons why this matters.
First, Japan is the second-biggest division of MCD stock after the U.S., so recovering there would improve McDonald’s figures a little bit.
Second, management said during a post-earnings call in January that it is exploring sales of part of its stake in its Japan business. A continued and sustained recovery in this division could help MCD receive better offers.
Takeaway for McDonald’s
The first-quarter financial figures continue to prove that McDonald’s has a working recovery plan in place.
And this further shows that, even though it has been through rough times lately, MCD is a huge and stable company, making it a good one for income seekers.
As of this writing, Craig Adeyanju did not hold a position in any of the aforementioned securities.
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