McDonald’s is taking short term pain for long term gain when remodeling its fast-food experience, says a team of analysts from Jefferies.
The fast-food giant has been aggressively updating its US stores under its Experience of the Future initiative, which focuses on restaurant modernization and digital engagement. On the company’s second-quarter earnings call, CEO Steve Easterbrook said there are now 5,000 EOTF restaurants.
“The Company expects capital expenditures for 2018 to be approximately $2.4 billion,” McDonald’s said in a July 26 press release.
“About $1.5 billion will be dedicated to our U.S. business, primarily focused on accelerating the pace of EOTF. We expect to complete EOTF at nearly 4,000 additional U.S. restaurants in 2018, and, as a result, about half of the total U.S. restaurants will have EOTF by the end of 2018.”
And in a note sent out to clients on Tuesday, a team of Jefferies analysts said, “EOTF will create several more quarters of headwinds as accelerated conversions in 2018 are a positive, but typical store closures of 5-10 days are offsetting the sss boost from previous quarters’ remodels.”
The added: “We believe it is not well-understood by the market, and still impressive that McDonald’s US is generating close to 3% same store sales even without the full benefit of EOTF. We believe this “headwind” flips to a “tailwind” in first quarter in 2019, as borne out in our analysis.”
Jefferies thinks McDonald’s efforts on service model, digital channels, and loyalty initiatives are paying off, suggesting the use of the mobile app for some dollar deals helps drive downloads and Mcdonald’s $1/2/3 platform still gains traffic in a very competitive environment. That will reaccelerate the company’s US same store sales into fiscal year 2019, they said.
The team has a “buy” rating on McDonald’s, with a $190 price target — 18% above where shares are currently trading.
McDonald’s shares are down 7% this year.