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McDonald's: Investors Are Optimistic before Its 2Q17 Earnings

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Part 2
McDonald's: Investors Are Optimistic before Its 2Q17 Earnings PART 2 OF 6

McDonald’s 2Q17 Revenue: What Do Analysts Expect?

Revenue sources

McDonald’s (MCD) generates its revenue from sales at company-owned restaurants in addition to franchise fees and royalties collected from franchisees. In 1Q17, sales at company-owned restaurants formed 60.1% of the total revenue.

McDonald&#8217;s 2Q17 Revenue: What Do Analysts Expect?

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2Q17 revenue estimates

For 2Q17, analysts expect McDonald’s to post revenue of $5.96 billion—a fall of 4.9% from $6.27 billion in 2Q16.

With the aim to optimize its operations, McDonald’s has planned to reduce the number of company-owned restaurants to 5% by the end of 2018. The company has been refranchising company-owned restaurants. Compared to 2Q16, the company operated 560 fewer company-owned restaurants by the end of 1Q17. Refranchising might have prompted analysts to forecast a decline in McDonald’s 2Q17 revenue.

However, some of the declines are expected to be offset by positive same-store sales growth and the addition of new franchised restaurants. Compared to 2Q16, the company operated 961 more franchised restaurants by the end of 1Q17.

New initiatives

The company’s management is focusing on improving the quality of its menu items, enhancing customers’ experience, and providing menu innovations in order to drive its sales. McDonald’s has removed all of the artificial ingredients from its Chicken McNuggets. It started using chicken that isn’t fed antibiotics. It introduced new buns without high-fructose corn syrup. McDonald’s also introduced healthier options for kids.

To enhance customers’ experience, the company is focusing on digital delivery and “experience of the future” restaurants. The company implemented the mobile order and pay service in 400 restaurants. It plans to expand the service to 20,000 restaurants by the end of 2017. After getting a positive response from the delivery service in Florida, McDonald’s plans to expand the service to other cities. These initiatives, along with menu innovations, are expected to drive McDonald’s SSSG in 2Q17.

Peer comparisons and outlook

In 2Q17, Restaurant Brands International (QSR) is expected to post revenue growth of 9.9%, while Jack in the Box (JACK) and Wendy’s (WEN) revenues are expected to fall 1.8% and 21.0%, respectively.

For the next four quarters, analysts expect McDonald’s to post revenue of $21.52 billion—a fall of 11.8% from $24.39 billion in the same quarters the previous year.

Next, we’ll ook at McDonald’s estimated EBIT margins.

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