McDonald's (MCD) has a host of new initiatives in place to fatten its profits and stock price, one veteran restaurant analyst says.
In a new client note out Thursday, Evercore ISI analyst David Palmer outlined three changes McDonald's is making. "Small improvements are building up to big results," Palmer wrote.
First, an improved grading system for franchisee performance will unlock big results, the analyst said. By having a more engaged franchisee base, Palmer thinks McDonald's stands to produce better profits over time.
The enhanced grading system will essentially weed out lagging franchisees, leaving more financially sound ones.
Second, McDonald's introduction of a "ready on arrival" digital ordering system could yield market share gains, according to Palmer's research.
The mobile ordering technology integrates geofencing that can notify restaurants when customers are arriving. The app notifies the restaurant when a mobile order customer is within three minutes of the location, speeding up the food pick-up process.
Palmer believes this will help unclog McDonald's drive-throughs during peak dinner hours and bolster customer perception.
And lastly, Palmer is taking a bullish stance on new cooking techniques for patties. The meat will be cooked in smaller batches and grilled with onions, resulting in hotter, juicier, and more flavorful burgers, Palmer believes. The logic: Better burgers, better sales.
The operational tweaks come as McDonald's stock has packed on the pounds this year.
Shares of the Dow Jones Industrial Average component have gained nearly 12% year to date, spurred on by investors' flight to safety and a series of strong quarters.
The stretch of strong quarters for McDonald's continued into the start of 2023.
McDonald's first quarter same-store sales rose 12.6% both in the US and internationally. Wall Street analysts modeled for same-store sales rising 7.5% in the US and 8.2% globally.
But there are a few red flags to the McDonald's investment story, partially explaining why management is standing up new profit-driving initiatives.
McDonald's said it's seeing "pressure" on its key units per transaction measure, it told investors this week on its earnings call. That means the typical cost-conscious McDonald's customer is balking at higher menu prices.
"We are seeing in some places resistance to pricing, more resistance than we saw at the outset," McDonald's CEO Chris Kempczinski warned.
That has Wall Street on high alert for a sales disappointment in the second quarter.
"We do think the one-year global same-store sales has hit a near-term peak in 1Q23, and we expect moderation over the next seven quarters as both year over year pricing and underlying year over year employment gains slow down (but stay positive) in most major markets," JPMorgan analyst John Ivankoe wrote in a note to clients.
Brian Sozzi is Yahoo Finance's Executive Editor. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Tips on deals, mergers, activist situations or anything else? Email brian.sozzi@yahoofinance.com
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2023-04-27 18:22:49Z
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