McDonald’s (MCD) operates about 13,800 restaurants across the United States, and the company just announced a plan to overhaul thousands of them.
On September 23, during its Investor Day, McDonald’s detailed its broader growth strategy called McDonald’s > NEXT. The strategy is built on four pillars:
- Menu > NEXT (new food and drinks)
- Consumer > NEXT (personalized marketing and loyalty)
- Restaurant > NEXT (store remodels, simpler operations, and a generative AI system called ArchIQ)
- People > NEXT (employee training and hospitality)
The pillar I’m particularly interested in is Restaurant > NEXT, as it involves a roughly $800,000-per-store remodeling plan.
Chairman and CEO Chris Kempczinski told investors the chain will rely on its “scale, customer insights, brand loyalty, and operational capabilities” to execute the plan. And Bank of America thinks it could be a step in the right direction.
BofA sees an $800,000 bet on remodeling with a four-year payback
According to a BofA Global Research note shared with me, analyst Sara Senatore expects McDonald’s to spend about $800,000 on each traditional U.S. drive-thru to meet the Restaurant > NEXT standard. McDonald’s expects franchisees to recoup their share of the investment in about four years, a payback period Senatore says “compares favorably” with previous remodelings.
Also read: McDonald’s just did something not seen in decades
In the past, when McDonald’s and rivals like Restaurant Brands International (QSR) and Wendy’s (WEN) planned any upgrades, it often took about eight years or more to earn back the money they spent. A shorter payback period this time is one reason Senatore believes Restaurant > NEXT can improve the company’s store-level sales.
But even though she believes the project can increase the company’s sales, Senatore kept a Neutral rating on McDonald’s and maintained her $343 price objective. She believes the long-term benefits are offset by how much the plan requires franchisees to spend and how long it takes for sales to increase.
Senatore is a Managing Director at Bank of America and has covered the restaurant group for nearly two decades, so many investors value her opinion.
Why most of the remodels won’t begin until 2028
Another thing to note is that very few remodels are expected to happen in 2027. In the BofA note I got, it was outlined that several design and technology pieces needed for Restaurant > NEXT won’t be ready until 2028, which means most of the work won’t start until then, or even 2029. BofA expects about 8,000 U.S. stores and 2,000 McDonald’s stores in international operated markets to be remodeled across those two years.
McDonald’s plans to use $8.5 billion to support franchisees through 2036, with about $5 billion arriving before 2030, Restaurant Dive reported. BofA also assumes the company will give up roughly a quarter of its annual rent for four years on each remodeled store.
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However, that should only start in the first year of the remodeling. Because rent abatements are straight-lined over the life of the lease, the hit to McDonald’s take rate, the share of franchisee sales it keeps as rent and royalties, will stretch out well past the four-year abatement period.
BofA expects the drag on McDonald’s U.S. and international operated markets take rate to average about 30 basis points per year between 2030 and 2036.
CFO Ian Borden told investors, “The full Restaurant > NEXT program should generate attractive returns for both our franchisees and McDonald’s.”
How to think about McDonald’s shares from here
If you already own McDonald’s shares, remember that the McDonald’s > NEXT project is a long-term undertaking with major financial implications that will reduce the company’s free cash flow for years to come.
Also, for everything to work out, franchisees need to be willing to spend on the remodeling, and customer traffic has to improve once stores reopen.
In the meantime, McDonald’s quarterly dividend of $1.93 could support investors while they wait for the long-term plan to pay off.
Raymond James analyst Brian Vaccaro said NEXT’s success will need to be judged “in years rather than quarters,” according to Parameter, and that feels like a fair evaluation to me.
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