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McDonald's 1Q17 Expectations: Who's Loving What

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Part 2
McDonald's 1Q17 Expectations: Who's Loving What PART 2 OF 6

Inside McDonald’s 1Q17 Revenue: Gauging the Analyst Expectations

Revenue sources

McDonald’s (MCD) earns its revenue from company-operated restaurant sales and royalty and license fees collected from its franchisees. In 4Q16, company-owned restaurant sales made up 60.6% of total revenues, while the remaining 39.4% came from its franchisees.

Inside McDonald&#8217;s 1Q17 Revenue: Gauging the Analyst Expectations

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1Q17 revenue estimates

In 1Q17, analysts are expecting McDonald’s to post revenue of $5.5 billion, which would represent a fall of 6.6% from its $5.9 billion in 1Q16. By optimizing its operations, McDonald’s aims to convert 95% of its restaurants to be franchisee-owned by the end of 2018.

The company has been refranchising its company-owned restaurants as well. As compared to 1Q16, the company was operating 601 fewer company-owned restaurants by the end of 2016. The decline in company-owned restaurants has prompted analysts to forecast a fall in 1Q17 revenue, however.

New initiatives

Some of the expected declines in revenue, however, are being offset by growth in the number of franchised restaurants and in positive SSSG (same-store sales growth). The company has been focusing on quality of food, menu innovations, enhancing customer experience, and value additions to improve its SSSG.

The company has also removed all artificial ingredients from its Chicken McNuggets, introduced new buns without high-fructose corn syrup, and started using chicken not raised on antibiotics. Its move to menu innovation, the launch of Grand Mac, and the introductions of Mac Jr. in January 2017 and Sriracha Big Mac in November 2016 are all expected to contribute towards 1Q17 revenue.

Peer comparisons and outlook

By comparison, analysts are expecting Jack in the Box (JACK) and Restaurant Brands International (QSR) to post revenue growth of 2.4%, and 7.8%, respectively. Analysts expect Wendy’s (WEN) revenue to fall 25.4% in 1Q17.

Analysts are expecting McDonald’s to post revenue of $21.6 billion in 2017, which would be a fall of 12.2% from the $24.6 billion it saw in 2016. The refranchising of its company-operated restaurants is expected to lower McDonald’s revenue throughout 2017.

Next, we’ll look at the analysts’ estimates for MCD’s EBIT (earnings before interest and tax) margin in 1Q17.

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