McDonald's (MCD) is earning its higher stock price.
Believe me, I have been skeptical of McDonald's turnaround for good reason. For years, the Golden Arches just didn't seem to get it on so many fronts. Relations with franchisees sucked. The menu had grown as bloated as someone who eats a Big Mac three times a day. And the company's new-product news was basically retreads of failures from yesteryear. However, I entered the year more open to McDonald's turnaround taking shape -- the company had started to prove me wrong in the latter stages of 2015.
Mickey Dee's has continued to impress thus far in 2016, too. The company is not just proving to me and the broader stock market that it deserves its 25% stock increase over the past year, but it deserves to head even higher. It's gaining that street cred for one single reason (at least in my eyes): It continues to demonstrate that the thinking that drove horrible financials from 2011 to 2014 is a distant memory.
Here are several things I viewed very positively from McDonald's presentation at UBS on Wednesday.
Bigger Still Not Seen as Better
McDonald's slashed the number of items on its menu early last year, finally. Doing so made menu boards easier to read for hurried consumers. It also helped speed up service as employees were making more of the same products. As no coincidence, McDonald's U.S. same-store sales began to turn the corner during the summer after the menu reduction.
With same-store sales popping in the fourth quarter due to the new all-day-breakfast platform, it would have been easy for McDonald's to fall back into its habits of unleashing more menu items to try to really pump up the sales to impress Wall Street. However, it has maintained its new less-is-more philosophy. "We want to make sure that we're focusing on fewer, bigger platforms rather than a lot of incremental things," said McDonald's U.S. President Mike Andres on the call. Amen, brother.
Andres said McDonald's is focusing squarely on beef and chicken, suggesting it could pare the menu down further at some point in 2016 (menu still has a bunch of likely fringe-selling items).
FINALLY, BETTER INGREDIENTS!
Yes, McDonald's using better ingredients is important enough to put the heading in caps. Other than announcing in the past few months a commitment to using cage-free eggs, chicken without antibiotics and some kale in one salad in Canada, McDonald's has been slow to improve ingredient quality. I don't expect McDonald's to ever offer a completely "clean" menu (free of artificial ingredients and preservatives), as is the case at Panera Bread (PNRA). Nor do I expect it to have the high-quality menu of Shake Shack (SHAK). But McDonald's has a hell of an opportunity to remove all sorts of unnecessary ingredients in order to get into the good graces of a healthier-eating America.
Said Andres, "We recognize that people want better ingredients, they want cleaner labels and we're going to deliver that for them. ... It's that simple, it's an expectation and we're not going to ignore it."
He added, "We've decided that we're not going to go out there and tell what we're going to do, we're going to do it first. So all those things are in process, and I'm pleased with the progress that we're making, and I think our customers will be pleased as well."
Here Comes a Better Value Menu
In January, McDonald's launched its new McPick 2 value menu that replaced the longtime dollar menu. Pretty straightforward concept: Choose two items from a specified list. This month, McDonald's fine-tuned the program to McPick 2 for $5, where consumers chose two more premium items for $5. I think these were both tests of something more impactful later this year.
"We've never had a turnaround that didn't have value as a critical component of it and, quite frankly, over the last couple years, we've been splintered -- our value has been somewhat invisible to the consumer," admitted Andres. The exec reiterated McDonald's commitment to a more permanent value platform -- I suspect it will be the latest variation as it allows operators to sell higher-priced products, which also helps compensate for higher costs for employees and remodels.
McDonald's Finally Goes Digital
McDonald's will likely launch its long-awaited national rewards program later this year or early 2017. With 7.5 million downloads of its relatively barebones app, the potential for McDonald's to unlock sales through a digital rewards program is enticing. I don't think the impact of that is priced into the stock. Rewards programs, if done right, could move the needle -- just ask Starbucks (SBUX), which is driving higher tickets due to its strong rewards program and mobile app experience. (Panera Bread and Starbucks are part of TheStreet's Action Alerts PLUS portfolio.)
McDonald's finally seems to understand it needs to be on mobile ... like yesterday. Judging by the way it discusses mobile, it sounds as if execs get what has to be done here as well.
"We're moving to this point of mass personalization where we talk to each of our customers individually based on what their needs are -- if we see them falling off, we can entice them with their favorite products to come back to the restaurant," said Andres. Doing this, he said, could create a "significant sales layer" for McDonald's.
I tend to agree.