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Why Analysts Expect McDonald’s Revenue to Fall in 4Q16

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Sources of revenue

McDonald’s (MCD) earns its revenue from company-operated restaurant sales and royalty and license fees collected from its franchisees. In 3Q16, the company earned 61.8% of its revenue from company-owned restaurant sales, while the remaining 38.2% came from franchisees.

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4Q16 estimates

Analysts are expecting McDonald’s to post revenue of $6.0 billion, which represents a fall of 5.4% from the $6.3 billion reported in 4Q15. Aiming to increase its franchised restaurant unit count to 95.0% of its total restaurants by 2018, McDonald’s has been refranchising, which is expected to lower its revenue in 4Q16. Between the beginning of 2016 and the end of 3Q16, the company refranchised 1,000 restaurants. However, analysts are expecting positive same-store sales growth (or SSSG) to offset some of the revenue decline.

The company has been focusing on three main aspects to improve its SSSG and drive people to visit McDonald’s frequently: food quality, guest experience, and value additions. To improve the quality of menu items, the company has removed artificial ingredients from its Chicken McNuggets, introduced new buns without high-fructose corn syrup, and started using chicken that is not raised on antibiotics. As for guest experience at its restaurants, the company has implemented dual-point service, self-order kiosks, and digital menu boards, and reimaged old restaurants.

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To innovate its menu in 3Q16, the company expanded its All Day Breakfast menu with the introduction of McGriddles, McMuffins, and Biscuit sandwiches. The company has also implemented strategies to tailor menu items to local customer tastes. These initiatives are expected to boost McDonald’s SSSG in 4Q16.

Peer comparison

Analysts are expecting Jack in the Box (JACK), Wendy’s (WEN), and Restaurant Brands International (QSR) to post revenue growth of 6.1%, -33.7%, and 4%, respectively.

Outlook

For the next four quarters, analysts expect the company to post revenue of $23.2 billion, which represents a fall of 7.2% from the $24.9 billion reported in the previous corresponding period. Analysts expect McDonald’s revenue to fall due to refranchising. Next, we’ll look at McDonald’s 4Q16 estimated margins.

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