High Costs & Sales Slump To Hurt McDonald's (MCD) Q1 Earnings

McDonald's Corporation (NYSE:MCD) is set to report first-quarter 2019 financial numbers on Apr 30, before the opening bell.

The company’s increasing focus on refranchising initiatives has been keeping revenues under pressure of late and we believe that first-quarter sales are also likely to have suffered from the same. Meanwhile, high costs and persistent pressure in margins are likely to have dented earnings in the to-be-reported quarter.

However, the company’s efforts to strengthen position through various sales-building initiatives, along with an increased focus on franchising, posit it for growth. Backed by better-than-expected earnings for 18 consecutive quarters, shares of McDonald’s have gained 25.3% in the past year, outperforming the industry’s 23.1% growth.

Let us find out how the company’s top and bottom lines will shape up in first-quarter results.

Top-Line Downtrend to Persist

McDonald’s declining revenues have been weighing on the overall performance for quite some time. Revenues declined 8% year over year in 2018. This trend is likely to have continued in the first quarter. The Zacks Consensus Estimate for net revenues is pegged at $5 billion for the to-be-reported quarter, reflecting a 3.8% fall from the prior-year quarter’s reported figure.

The downtrend in top line reflects the impact of the company’s refranchising initiatives. During the last reported quarter, company-operated restaurants’ revenues declined 11% year over year to $2,371.2 million. However, the same at franchise-operated restaurants improved 5% to $2,791.8 million.

The Zacks Consensus Estimate for company-operated restaurants’ revenues in the first quarter indicates an 11.7% decline from the year-earlier reported figure while franchise revenues are likely to increase 3.6% from the year-ago quarter.

Bottom Line Picture

Although McDonald’s refranchising initiatives are supposed to have favored earnings in the first quarter of 2019, we are apprehensive of high costs that it has been incurring. Apart from wage inflation, costs associated with brand positioning in all the key markets as well as ongoing investments in initiatives are likely to have dented earnings in the quarter under review.

Subsequently, the Zacks Consensus Estimate for McDonald’s first-quarter earnings is pegged at $1.74, suggesting a 2.8% decline from the year-ago quarter’s reported figure.

What Does the Zacks Model Unveil?

Our proven model does not predict that McDonald’s is likely to beat earnings estimates this quarter. This is because a stock needs to have — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — for this to happen. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

McDonald’s has an Earnings ESP of -1.94%. The company’s Zacks Rank #4 (Sell) further decreases the predictive power of ESP.

You can see the complete list of today’s Zacks #1 Rank stocks here.

McDonald's Corporation Price and EPS Surprise

Stocks to Consider

Here are a few stocks from the Restaurant space that investors may consider as our model shows that these have the right combination of elements to post an earnings beat in the first quarter.

Bloomin’ Brands (NASDAQ:BLMN) presently carries a Zacks Rank #3 and has an Earnings ESP of +0.20%. The company is scheduled to report quarterly numbers on Apr 26.

Yum! Brands (NYSE:YUM) has an Earnings ESP of +1.49% and a Zacks Rank #2. The company is scheduled to report quarterly numbers on May 1.

Dunkin’ Brands (NASDAQ:DNKN) has an Earnings ESP of +0.13% and a Zacks Rank #3.

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