McDonald’s analyst on earnings: U.S. results were ‘really no surprise’

McDonald's reported fourth quarter earnings that missed expectations. BTIG Restaurants Analyst Peter Saleh joins Yahoo Finance Live to discuss.

Video Transcript

ZACK GUZMAN: Let's bring on BTIG Restaurant Analyst Peter Saleh joins us now. And Peter, when we look at it, you might look at that same-store sales growth and say, look, that's pretty strong here for McDonald's. Of course, we've seen other restaurants, like Chipotle, benefit from people shifting to take out. What do you make of the results and how it stacks up?

PETER SALEH: Look, I think the results for McDonald's were really no surprise. I mean, you saw strong results out of the US and really driven by the drive-through business, which was very healthy. Good numbers throughout the quarter. Every daypart was positive throughout the quarter. And we saw an acceleration in the US into the month of January with high single-digit same-store sales growth on the heels of the stimulus checks.

On the flip side, though, you're looking at some of these international markets, which are fairly sizable for McDonald's, and they saw a deceleration as you went through the quarter, more lockdowns, and that continued into the new year. So you know, not really much of a surprise. I don't think it took anybody by surprise. You can see the reaction, the stock down maybe a percent, maybe less than that. It was up earlier today, so not really taking anybody by surprise in terms of the results this morning.

AKIKO FUJITA: Peter, one of the big concerns weighing over the sector as a whole is this push by the Biden administration to raise the federal minimum wage to $15 an hour. You've put together a pretty interesting study that looks at the impact from the business standpoint, but also the state side, because we have seen states like a California, like a Florida, who've already raised the minimum wage. Who's likely to take the biggest hit if we're talking about states on the-- if this, in fact, does go through?

PETER SALEH: Right. So just to keep in mind that the federal minimum wage may go up from $7.25 to $15 if they pass it. It'll probably be phased in over the course of five years, maybe six years, bringing it up over that time, and then it'll start to be indexed to inflation going forward. So it won't be a overnight jump. It'll be a phased in approach.

Look, there are about 20 states in 2020 that were at the federal minimum wage, most of them in the South and Southeast, states like Texas, which would be the biggest state with the $7.25. Those are the states that are going to feel the biggest impact, because they have the furthest decline from the $7.25 to $15. But there are a lot of states across the country, the rest, I mean, 30 other states, including California, New York, New Jersey, even Florida, that are well above that $7.25 threshold. So they won't see as big of an increase going forward as you would anticipate.

ZACK GUZMAN: Yeah, you mentioned New Jersey there. I would wonder what kind of impact it might have on some of these smaller businesses, smaller restaurants relative to the larger chains, because that is some pushback that we've heard in the state of New Jersey where they're saying, look, it's unfair for us, especially in a pandemic. So how does that change the competitive landscape?

PETER SALEH: Yeah. Look, it's-- it's going to be-- hopefully it'll be fair across the board, and I think it will be. If every restaurant is having-- is paying the same amount for labor and it rises at the same rate, the really only alternative that many of these restaurants have is to raise menu prices. And they've been dealing with this-- if you look at states like California and New York, New Jersey, and some other states around the country that have had a much higher wage rate, you know, these restaurants have been operating just fine.

I mean, they-- they just raise-- they have no choice but to raise their price. Many of them won't really cut the service. They will raise menu prices. And so you see the wage rate and the menu prices go up a little bit faster than they historically would.

But the consumers will accept that over time. So as long as it's flat across the entire industry, I think all you're really going to see is inflation, and the restaurants will adjust. They have to protect their margins. They're not going to close their doors. And really, just the result, the end result, is higher menu prices to the consumer.

AKIKO FUJITA: And Peter, you have highlighted some of the names that you think are particularly exposed to any kind of increase in the minimum wage, Darden Restaurants one of them, Chipotle, Shake Shack another one. What kind of hit are we talking about?

PETER SALEH: So the reason I think those types of-- those companies are more exposed is because of their business model. They tend to own all their restaurants, so they have to deal with not only the top line, but all the inflation within-- within the income statement. If you take a look at something like a McDonald's or some of the quick-service restaurants, they're 95%, 98% franchised. The franchisees deal with the labor inflation.

McDonald's as a corporation is really just clipping a piece of the-- the royalty rate and taking that as-- within their income statement. So they don't have as much pressure within their income statement on the labor side as the franchisees do. So those-- you know, those names that we highlighted, Darden and maybe Shake Shack, they own more of their locations. They would feel more pressure. I would tend to think that across the board the rate of menu price increase will be similar, but the impact on margins will be more severe for company owned business models than you will see for franchise business models.

ZACK GUZMAN: Interesting. OK, so those other ones levered, too, maybe the franchise model might be able to weather the storm as well. So if it's not just a McDonald's, what other-- what other restaurants out there are particularly level to that franchise model?

PETER SALEH: I mean, you've got lots in the quick-service space, right. So you've got Wendy's is a quick-service operator. Anything with a drive-through really has a highly franchised business model. Many of the pizza operators, from Domino's and Papa John's, highly franchised. All of Yum's restaurants are highly franchised. So they are a little bit more insulated.

I think the one thing we have not spoken about, though, is-- you know, the minimum wage gets a lot of the headlines, but the elimination of the-- the tip wage, I think, is another major issue for especially some of these casual diners or full-service restaurant operators. Look, there's about seven states right now that don't have that tip wage. And if we eliminated it for the rest of the country, I think what you're going to see is, again, more pressure on menu prices going higher, but I think it also creates a discrepancy within the restaurants.

Now you've got the waiter or waitresses earning $15 an hour plus tips on top of that. The guys in the back of the house will be earning far less. So the restaurants are going to have to figure out how to make up the difference there.

And I think that creates a challenging dynamic for restaurant operators, and we'll see how they deal with it. But for now, I think the federal minimum wage definitely gets the bulk of the attention. But I do think you are, in essence, going to see just higher menu prices and better efficiencies within the four walls of the restaurants to offset it.

AKIKO FUJITA: Yeah, I thought it was interesting how you also mentioned that you think restaurant operators are increasingly going to be utilizing ghost kitchens as they face the pressure from the minimum wage to appear. It's good to talk to you. Peter Saleh is BTIG Restaurants Analyst.