The Resilience of Fast-Food Retail in the Face of COVID-19

The COVID-19 pandemic completely upended the restaurant industry...

With lockdown mandates in place beginning in the spring of 2020, restaurants and bars relied solely on takeout and delivery orders. This led to massive declines in sales across the entire U.S. food-service space. But now, restrictions are being lifted and people are returning to their favorite dining establishments and watering holes.

This economic resurgence is giving the restaurant industry the chance to recoup some of its lost sales from the past 18 months. But a select few restaurants fared just fine throughout the pandemic. Their sales may have fallen, but not to the extent of many other establishments. And now, they're building on that resilience to further strengthen their businesses.

Today, we're highlighting a company that fits this description perfectly...

McDonald's (NYSE: MCD) is a titan of the fast-food industry. It's one of the largest restaurant chains in the world, with a giant, global market footprint. The company has more than 39,000 restaurants in over 100 countries across the world.

Because of this, McDonald's is one of the most recognized global brands.

Put simply, McDonald's sells "addictive" products. Its burgers, fries, and milkshakes are high in fat, sodium, and sugar. And they keep people coming back for more. As a result, McDonald's has generated steady, reliable sales for over 65 years.

McDonald's is also one of the most capital-efficient companies out there. Instead of owning all of its restaurants and covering the cost of each item, McDonald's franchises its locations. As of June 30, 2021, 93% of McDonald's locations were owned and operated as franchises. Under this business model, the restaurant owner first pays McDonald's to buy a franchise. He or she then puts up all the capital to run it. McDonald's lends its highly recognizable brand name and managerial expertise, which costs much less than running the franchise itself.

At the end of the day, McDonald's sits back and collects royalties on each sale that its franchises generate, on top of the franchise fees it charges up front.

That helps McDonald's produce loads of our favorite financial metric – free cash flow ("FCF"). FCF is the amount of cash left over after all business expenses and capital expenditures.

Now, let's take a look at how McDonald's has performed in recent months...

The company fared better than most restaurants throughout the COVID-19 pandemic. According to company data, 95% of McDonald's restaurants have drive-thru windows. This has allowed customers to get their fix of burgers and fries quickly (and safely), without ever leaving their cars. As a result, McDonald's didn't experience the same decline in sales as other restaurants. In 2020, McDonald's sales fell about 9%. But its comparable store sales in the U.S. actually grew by 0.4% in the whole of 2020, compared with 2019.

Other restaurants – like dine-in chain Darden Restaurants (DRI) – saw sales decline by 20% or more for four straight quarters because of the pandemic. Darden is only now seeing sales return to "normal" levels, while McDonald's is well ahead of that pace.

Results from the most recent quarter provide more evidence of the company's strength...

McDonald's beat both earnings and revenue estimates. Global comparable store sales surged 40.5%, beating Wall Street's 38.9% growth estimate.

Remember, sales tumbled in the second quarter of 2020, as the quarter hardest hit by lockdowns. McDonald's is posting huge growth numbers as things normalize.

But now, comparable store sales are even stronger than "normal" levels. Global comparable store sales were up nearly 7% from the second quarter of 2019. And in the U.S., the company's operations are even stronger. In fact, U.S. comparable store sales were up almost 15% from 2019 levels in just the second quarter of 2021.

These strong results propelled McDonald's shares to fresh all-time highs. But over the longer term, performance is just as impressive... Over the past five years, MCD's stock generated 125% returns, including dividends.

Throughout the pandemic, McDonald's outperformed just about every other business in the food-service industry. And now, it's building on that strength, already running above 2019 levels. Competing restaurants, on the other hand, are still struggling to reach "normal" levels.

At the end of the day, people will continue to flock to McDonald's restaurants to get their fix of burgers and fries. The company's effective business model and consistent appeal should position McDonald's for more gains ahead.

Sometimes investing is simple.