3 Takeaways From McDonald’s Q3 Earnings

McDonald’s (NYSE:MCD) reported its fiscal 2020 third-quarter earnings results earlier this week, announcing adjusted earnings per share of $2.22 on revenue of $5.42 billion, which came in above consensus expectations of $1.91 EPS on $5.4 billion. The company reported that it is seeing a global recovery in its revenue, boosted by product strength and strong performance in drive-thru and delivery. McDonald’s management said its marketing and promotional efforts are also yielding a lot of interest from customers.

That was a basic summary of this latest earnings report. But we need to dig a little deeper into the details to get at three important takeaways from McDonald’s third-quarter earnings release and what investors really need to know about it.

McDonald's Famous Orders meal

Image source: McDonald’s.

1. Promotional activity and marketing investments bolstered sales

McDonald’s “Famous Orders” marketing campaign in the U.S. has been effective, reminding customers to dine out again by showcasing the go-to meals of popular celebrities. McDonald’s worked with two popular brand advocates — musicians Travis Scott and J Balvin — to create a meal offer with each celebrity’s favorite go-to items. The $6 Travis Scott meal was so popular that some restaurants temporarily sold out of certain ingredients in the meal.

The Travis Scott meal rolled out in September, and the J Balvin meal was available in October. To further entice diners, those who bought the J Balvin meal as an offer on the McDonald’s app got a free Oreo McFlurry. The fast-food giant said it plans to have more marketing campaigns with influencers and artists in the future.

Another smart marketing move was adding spicy Chicken McNuggets to the McDonald’s menu for a limited time starting Sept. 16. This drummed up lots of media stories and got diners excited to try an upgraded version of the classic nuggets, the first spicy version since McNuggets launched in 1983. Similar to the Travis Scott meal, the quick-service chain was overwhelmed by the demand. Two weeks after the launch, the new nuggets were nearly sold out.

2. McDonald’s continues to see recovery and sequential improvement

McDonald’s global comparable sales improved in the third quarter to a loss of 2.2% compared to a loss of 23.9% in the second quarter. U.S. McDonald’s restaurants saw an increase of 4.6% in comparable sales in the third quarter, up from a decrease of 8.7% in the prior quarter. The consumer discretionary company also saw monthly increases during the third quarter. The company’s brand strength, as well as its extensive drive-thru and delivery offerings are bolstering the revenue increases.

Most of the fast-food chain’s restaurants were open at the start of the third quarter. However, results are being impacted by government restrictions on dining room openings, capacity, and operating hours in many countries.

Drive-thru and delivery continue to be integral to the restaurant company’s business, as the off-premise segment has appealed to consumers concerned about safety and convenience amid the backdrop of COVID-19. Management called the drive-thru “one of the biggest areas of strength,” with the segment seeing larger orders. CFO Kevin Ozan spoke of the sustained strength of the drive-thru business on the third-quarter call: “In most markets, our drive-thru sales percentage peaked during the second quarter and remains elevated when compared to historical norms.”

McDonald’s outlined its intentions to invest further in its digital, drive-thru, and delivery in its Nov. 9 investor update: “To unlock further growth, the Company will accelerate technology innovation so that the tens of millions of customers who interact with McDonald’s each day can enjoy a fast, easy experience that fits their needs at the moment, whether a family dinner delivered to a doorstep or late-night fries from the drive thru.” The company also said that most new global restaurants will have a drive-thru.

3. Renewed COVID-19 restrictions on dining are impacting sales

McDonald’s international performance varied by country. Overall comparable sales in the international segment continued to improve at negative 4.4% in the third quarter versus the second quarter’s decline of 41%. European countries — including Spain and Italy — that are more heavily reliant on tourism, saw negative comparable sales.

However, near-term growth at the restaurant chain may be impacted by various regulations across countries. Several European countries are in the middle of a second wave of COVID-19-related restrictions. Both the UK and France are currently in lockdown, with non-essential businesses closed. This will likely impact McDonald’s sales in these regions. U.S. businesses are following different regulations depending on their locations.

On the other hand, Pfizer announced a COVID-19 vaccine on Nov. 9 that is reportedly 90% effective. Investors cheered this news, seeing a potential return to normal routines. If this is the case, consumers could shift back to dining in at restaurants instead of focusing on takeout and delivery. This could slow McDonald’s momentum with drive-thru and delivery.

The fast-food behemoth turned in a solid third quarter, driven by demand for its products and its success with digital and drive-thru segments. Consumers sought off-premise dining that provided value, convenience, and safety, and McDonald’s met those preferences. Investors should keep an eye on whether a future shift back toward on-premise dining has an impact on McDonald’s future expansion rates.

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