McDonald's U.S. Sales and Digital Meet Expectations

After digesting wide-moat McDonald's MCD first-quarter results, we maintain our fair value estimate of $231 and view the shares as fairly valued. A slightly quicker recovery than anticipated in the U.S. (with comparable-store sales up 13%) led us to modestly increase our EPS estimate (up $0.02 to $8.29), offset by higher stock-based compensation. After stripping out the impact of a gain on the sale of some of the firm's Japanese units, McDonald's EPS came in $0.11 higher than FactSet consensus, with a reported $1.92 representing 30% growth from a year ago. The firm's U.S. market, boosted by stimulus spending and February's chicken sandwich launch, healthily exceeded 2019 levels on a two-year stacked basis (up 13.1%), though the international operated markets division continued to see pressure. A heavy skew toward Western Europe capped same-store sales growth at 0.6% for the segment, down a third from 2019 as virus outbreaks and dine-in restrictions impeded guest traffic.

McDonald's digital efforts have begun to yield fruit, with the firm generating $1.5 billion through digital channels (mobile app, kiosk, and delivery) in the U.S., or approximately 14% of U.S. systemwide sales ($10.8 billion) for the period. Investments in "experience of the future" restaurants, featuring some combination of curbside integration, digital menu boards, multiple drive-thru lanes, and mobile order capabilities, should continue to drive throughput improvements, with an increasingly digital-friendly customer more likely to blur the lines that we've conventionally seen in the restaurant industry (limited overlap between carryout and delivery customers, for example). We view these investments as prudent, with customers continuing to demand omnichannel ordering capabilities, as off-premises volume in quick-service restaurants is expected to remain elevated and as the firm works to resolve previous drive-thru concerns, notably order accuracy and menu availability.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.