McDonald's makeover has 'tremendous potential'

pulse

April 25, 2018 4:17 PM

McDonald's U.S. makeover shows potential and RBC sees sales picking up in 2H 2018. Better industry trends, breakfast demand and fresh items should help.

Same-store sales rose slightly in March, driven by improving industry trends and a recovery breakfast demand.

McDonald's $1, $2, $3 Dollar Menu promotion came at a significant opportunity cost in the first quarter and the menu's long term success to win customers remains uncertain, RBC analyst David Palmer writes in a note to clients. However, he believes "tremendous potential upside remains" as the company works to execute the basics better and continues its brand makeover.

The fast-food giant's new Dollar Menu, which debuted in January and attempted to win customers with price cuts, launched with disappointing results as competing chains followed suit by also lowering prices. As a result, Palmer lowered his first-quarter same store sales estimate to 1% from 3.5%.

"We believe the US improvement story will continue, with quality improvements to food, digital conveniences, and restaurant assets," Palmer wrote. "That said, recent sluggish US sales imply that adjustments to the value platform may be needed."

Palmer lowered his first-quarter 2018 earnings-per-share estimate to $1.65 from $1.67, noting sales in key markets such as the UK may have been impacted by severe weather conditions.

"While the $1,$2, $3 value platform has been a less-than-perfect platform, we still see McDonald's at the beginning of a multi-year journey of improvement starting with the atmosphere but including in-restaurant execution (partly as a result of franchisee consolidation)," Palmer said.

He has a $170 price target, which he says is "based largely on our outlook for an ongoing US turnaround, re-accelerating in the final three quarters of the year, with solid ongoing international performance, and FCF conversion of 105%+ by 2021."

The company is scheduled to report its first-quarter results on April 30, with Wall Street analysts surveyed by Bloomberg expecting earnings of $1.66 a share on revenue of $4.97 billion.

Shares of McDonald's is down 9.2% this year.

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