MCD Stock’s Target Cut To $250 By Bernstein Amid Sales Growth Concerns, NEXT Uncertainty

According to The Fly, Bernstein said McDonald’s operating-margin improvement remains highly attainable, but the path to stronger sales growth is still unproven.

• The firm sees system-wide sales growth of about 4%, comprising roughly 2% same-store sales growth and 2% net unit contribution.
• Wells Fargo and Guggenheim also lowered their McDonald’s price targets earlier this week, citing concerns including U.S. sales trends, pricing and value, unit growth and capital investment.
• U.S. franchisees are reportedly raising concerns over NEXT investment costs of about $800,000 per restaurant, on top of scheduled remodels.

McDonald’s Corp. (MCD) is in focus Thursday after Bernstein lowered its price target on the stock, citing the company’s sales growth prospects while remaining constructive on its longer-term margin opportunity.

MCD shares were trading marginally higher at the time of writing on Thursday.

Bernstein Cuts McDonald’s Price Target

Bernstein lowered its price target to $250 from $295 and maintained a 'Market Perform' rating on McDonald’s shares, according to The Fly.

The firm said the potential margin destination remains compelling and views the operating-margin improvement as highly attainable. However, Bernstein said the sales bridge remains unproven, pointing to limited visibility into sales growth in the United States.

Bernstein is more prudent on system-wide sales growth of about 4%, comprising approximately 2% same-store sales growth and roughly 2% net unit contribution. The firm also said the potential upside from McDonald’s NEXT menu remains unproven.

Based on McDonald’s Oct. 7 closing price of $230.88, the $250 price target implies approximately 8.3% potential upside.

Franchisees Raise Concerns Over NEXT Investment Costs

The latest analyst note comes as McDonald’s franchisees are raising concerns about the investment required to implement the company's NEXT plan.

Bloomberg reported on Tuesday that U.S. franchisees are facing upgrade costs of at least $800,000 per location, based on company estimates. The multiyear initiative aims to improve food quality, service, and efficiency.

According to Bloomberg, some franchise owners were surprised by the price tag and have discussed concerns about the project's cost and lack of details in recent meetings. Operators are also concerned about taking on additional debt and are seeking more information from McDonald’s on the potential sales lift from the changes, Bloomberg reported.

The $800,000 NEXT investment would add to scheduled restaurant remodels costing at least $400,000, bringing the potential total investment to about $1.2 million per restaurant, according to Bloomberg.

McDonald’s has pledged about $8.5 billion in cash and rent relief to offset part of those costs, with the level of support varying by franchisee, Bloomberg reported.

The company said in a statement to Bloomberg that it remains confident in the plan and has established task forces with franchisees and company leaders to review the financials and work through the details.

Wells Fargo, Guggenheim Cut Targets

Bernstein’s Thursday note follows target cuts from Wells Fargo and Guggenheim earlier this week.

Wells Fargo analyst Zachary Fadem lowered McDonald’s price target to $270 from $300 while maintaining an 'Overweight' rating. TheFly reported that the firm said McDonald’s Analyst Day message remained difficult to digest, citing pricing and value concerns, limited trend visibility and risks tied to NEXT. Wells Fargo nevertheless continued to see long-term value in the shares.

Guggenheim analyst Gregory Francfort lowered the target to $250 from $290 while maintaining a 'Neutral' rating. TheFly reported that Guggenheim lowered its EPS estimates to account for softer U.S. same-store sales, slower global unit growth and capital reinvestments.

US Sales Remain A Key Watchpoint

The franchisee concerns come against a backdrop of slower U.S. sales growth. McDonald’s U.S. comparable sales increased 0.8% in the second quarter, down from 2.5% a year earlier, while comparable guest counts declined. Global comparable sales rose 1.3%, down from 3.8% a year earlier.

On Stocktwits, retail sentiment toward MCD remained in ‘Bearish’ territory over the past 24 hours.

MCD shares are down about 25% year to date.

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