With 41,198 locations as of September 30, McDonald's is the absolute largest fast food operation. The company is launching a chain of cafes in Bolingbrook, Illinois, near Chicago.
CosMc's
The coffee-focused concept is called CosMc's, named after an alien from a lineup of McDonald's characters from the 1980s.
According to images on social media, the menu for CosMc's will focus on beverages such as teas, lemonades, frappes, lattes, coffee and more. However, there also appears to be a menu that includes items straight from McDonald's, such as McMuffins.
Consistently outperforms the competition
The fast food industry is crowded, but McDonald's consistently outperforms its competition by leveraging its iconic brand and extensive global presence. Today, it is the largest publicly traded fast food chain by market capitalization at approximately $210 billion, far surpassing its closest competitor, Chipotle Mexican Grill, which is worth $61 billion.
McDonald's sales grow
McDonald's primarily uses a franchise business model, with 95% of its more than 41,000 locations owned and operated by independent business owners. Therefore, McDonald's revenues depend primarily on one-time new franchise fees as well as recurring rent and royalties on a percentage of franchise restaurant sales.
McDonald's sales peaked in 2013 at $28.1 billion and steadily declined before bottoming out at $19.2 billion in 2020. While the pandemic is the obvious reason for the sales decline in 2020, analysts attribute the decline to changing consumer habits, the drive to franchise company-owned stores, fluctuating exchange rates, and tougher competition.
The good news for McDonald's is that the trend is reversing, with the company generating roughly $23 billion in annual revenue between 2021 and 2022. In addition, the fast food giant has earned $25 billion in the past 12 months as the company has shifted its strategy.
There will be new restaurants on the market
First, management expects to open 1,900 new restaurants and close approximately 400 stores. This expansion is poised to deliver a net increase of nearly 4%, in contrast to a total of 40,275 at the end of 2022. This forecast signals a significant acceleration from the 2% increase in McDonald's store count in 2021 and a modest 0.6% increase in 2022.
Further, management favours increasing menu prices, which increases the average number of customers. As a result, same-store sales - a key metric for restaurants that measure the performance of existing outlets - are up 8.8% year-over-year. By comparison, Chipotle's same-store sales increased 5% year-over-year in the third quarter of 2023.
Return of capital to shareholders is a priority
Generally, the two methods of returning capital to shareholders are dividends and share buybacks. First, McDonald's is a long-term dividend-paying company. It has raised dividends for 47 consecutive years. Most recently, McDonald's increased its quarterly dividend by 10% to $1.67 per share, for an annual dividend yield of 2.3%.
Share buybacks offer a different approach to returning capital to shareholders because the company can reduce the number of outstanding shares, thereby increasing value for existing shareholders. Over the past five years, McDonald's has reduced the number of outstanding shares by 5.4%, and the company still had $7.1 billion remaining in its current share repurchase program at the end of September.
Are the shares suitable for purchase?
McDonald's is a company with enduring brand strength. The stock is currently trading at a price-to-earnings ratio of 25, comfortably below its five-year average of 28, meaning it currently looks undervalued.
Management must carefully balance menu prices so as not to discourage customers in the coming years. Yet the company's commitment to returning capital to shareholders is exactly what long-term investors should look for when making an investment.
