What Wall Street will be watching in McDonald's report

Lagging sales in the U.S., a China food safety scandal and macro headwinds in Europe: it's been a tough year for fast-food giant McDonald's.

The chain is set to report earnings before the opening bell Friday, and Wall Street will be eagerly awaiting a progress report.

A McDonald's Big Mac
Paul J. Richards | AFP | Getty Images
A McDonald's Big Mac

Analysts are cautious heading into the results. Just five out of 28 have a "buy" rating on the Dow component, according to FactSet, with nearly 80 percent rating its stock a "hold."

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While the company has a history of outperforming earnings estimates, recently it's bucked the trend. It topped Wall Street's earnings estimates just three of the last 10 quarters.

So what will analysts be watching?

US turnaround progress

Its domestic unit, the company's largest, has now posted four consecutive quarters of shrinking U.S. comparable restaurant sales.

"Clearly the U.S. has been the weakest fundamental market, and investors will be keen to understand the plan for turnaround and what traction has been gotten there," said RBC Capital Markets analyst David Palmer in a phone interview.

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To revive flagging U.S. sales, the company's embarked on a mutli-pronged approach including giving more decision making power to the regional level, emphasizing its food quality, paring down its menu to reduce complexity and focusing on innovation through a customizable platform.

This last move is aimed at addressing a big trend in restaurants—the ability for customers to customize meals—that's grown more popular with the rise of restaurants like Chipotle Mexican Grill in the fast-casual space.

"There will be losers and winners. Some restaurants and some restaurant categories will do better than others," said Efraim Levy, S&P Capital IQ equity analyst, in a phone interview. "Right now, fast food is suffering from a migration to fast casual."

Helping the company out are low gas prices and better weather, which analysts expect to help prop up restaurant sales.

Foreign exchange headwinds

But a stronger dollar translates into a headache for McDonald's and means its sales in currencies, like the euro, are worth less in U.S. dollars.

"With over half of profit outside the U.S., that's certainly an issue," Palmer said.

Wells Fargo expects ongoing currency and margin headwinds will likely continue to pressure earnings estimates for the chain. The firm cut its own estimate for the recently ended fiscal year and for fiscal 2015 on Wednesday, largely due to the dollar's appreciation.

Trouble in Asia

There is also the lingering China question. During the last quarterly conference call, McDonald's CEO Don Thompson noted it takes a while for customers to return in China once there's a food quality scare.

The company has seen continued fallout in China and Japan after one of its suppliers became the center of a food safety scandal in mid-July. Analysts will be watching for how the chain is able to stabilize the situation.

Wall Street expects continued contraction in the region. Same-store sales, according to Consensus Metrix, are pegged to drop 4.4 percent during the fourth quarter in its Asian Pacific Middle East Africa unit, which is a sharper decline than expected in any other region.

McDonald's 2.0

"Looking beyond the obvious – what they're going to do about comps—I'm most interested in technology," said Nicole Miller Regan, senior research analyst at Piper Jaffray, in a phone call.

The chain's plans for the future include a new global app this year in the U.S. that features some mobile payment opportunities, such as Apple Pay. Already the company has integrated Apple Pay in its U.S. restaurants, including its drive-thrus.

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Outside of the U.S., the company has already tested some of this new technology, including mobile payment in France, the global app in Australia and kiosks where customers can place orders.

"It trumps new menu items, it trumps marketing to some degree," Regan added. "We're just very interested in McDonald's and technology."

Regan has one of a handful of "buy" ratings on McDonald's on the Street, explaining "more or less, we're saying you've seen the bottom in terms of lackluster comps" and with an attractive dividend, she says there's a basis to be interested in owning McDonald's at this level.