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McDonald’s Reports Q1 Comparable Sales, Withdraws 2020 Guidance

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The COVID-19 outbreak had a significant impact on McDonald’s (NYSE:MCD) SSSG. On Wednesday, the company reported that its global SSSG rose 7.2% in the first two months of this year. However, the company reported a decline of 22.2% in its global SSSG in March as the intensity of the COVID-19 outbreak increased. For the first quarter, the company reported a decline of 3.4% in its same-store sales compared to an increase of 5.4% in the first quarter of 2019.

US fared better compared to other segments

For the quarter, the SSSG in the US rose by 0.1% compared to a decline of 6.9% in International Operated Markets and a decline of 4.3% in Markets & Corporate segments. In the first two months, the US segment’s SSSG grew 8.1% due to an increase in the average check and guest count. Also, one extra day of operation in February due to the leap year contributed to the SSSG. However, the segment’s SSSG declined by 13.4% in March.

Moving to International Operated Markets, the segment reported a decline of 6.9% in its same-store sales for the quarter. The company reported an SSSG of 8.5% in the first two months of the quarter. In March, the segment’s SSSG declined by a staggering 34.7%. Overall, the segment’s SSSG was impacted by the closure of 25% of McDonald’s restaurants in China during the coronavirus peak. The Markets & Corporate segment has reported a decline of 4.3% in its same-store sales for the quarter.

McDonald’s restaurant update

As of April 8, McDonald’s announced that it has opened 75% of its restaurants. In the US, the company is still operating 99% of its restaurants. The company said that most of its restaurants are only using the drive-thru, delivery, and take-out services. Some restaurants’ dine-in spaces are open depending on local restrictions. According to McDonald’s, closures are also based on restaurants’ location.

The International Operated Markets segment has only opened 45% of its restaurants as of Wednesday. The restaurants in France, Italy, Spain, and the United Kingdom have all closed. Meanwhile, the restaurants in Australia, Canada, Germany, and Russia continue to operate using only their drive-thru, delivery, and takeout services. The company said that some of the restaurants in these countries have also closed or only operate during specific hours with limited menu items and capacity.

The International Developmental Licensed markets segment has opened 75% of its restaurants as of Wednesday. In China, 98% of the company’s restaurants are open despite weak customer turnout. Meanwhile, McDonald’s stated that all of its restaurants are open in Japan. In Brazil, only 60% of the restaurants are open with limited capacity.

Other developments

McDonald’s will reduce its capital expenditures by $1 billion this year. The company undertake fewer “Experience of the Future” projects and open fewer new restaurants this year. McDonald’s secured $6.5 billion of financing in the first quarter. Meanwhile, the company abandoned its share repurchase program in March to help preserve cash. Also, the company announced that several executives have taken a pay cut to cope with the situation. Amid the COVID-19 outbreak, McDonald’s management withdrew it’s 2020 and long-term outlook.

Analysts’ recommendations for McDonald’s

Analysts’ reactions were mixed after McDonald’s announcement on Wednesday. Cowen raised its target price from $180 to $198. However, BTIG and Guggenheim reduced their target price. BTIG cut its target price from $240 to $220, while Guggenheim cut its target price from $205 to $198. As of Wednesday, analysts’ consensus target price was $200.86. The target price represents a 12-month return potential of 13.2%. Meanwhile, Wall Street is bullish on the stock. Among the 35 analysts, 71.4% recommend a “buy,” while 28.6% recommend a “hold.”

McDonald’s stock performance

On Wednesday, McDonald’s underperformed the broader equity markets. The stock rose just 1.1% compared to an increase of 3.4% in the S&P 500 Index. The weaker-than-expected SSSG led to a fall in the company’s stock price. As reported by Reuters, McDonald’s first-quarter SSSG fell below analysts’ expectation of a decline of 0.9%.

So far in 2020, McDonald’s stock has fallen by 10.2% as of Wednesday. Despite the fall, the company has outperformed its peers and the S&P 500 Index this year. Starbucks (NASDAQ:SBUX), Dunkin’ Brands (NASDAQ:DNKN), and Wendy’s (NASDAQ:WEN) have fallen by 18.6%, 22.6%, and 27.8% YTD, respectively. Meanwhile, the S&P 500 Index has declined by 14.9% during the same period.

McDonald’s operates 92% of its restaurants through franchises, which reduces the impact of a decline in the SSSG. Also, the company reported an impressive fourth-quarter performance. All of these factors appear to have caused the company to outperform its peers. I have been advocating a “buy” on McDonald’s for some time. Read Should You Consider Buying McDonald’s Right Now? to learn more.

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