One of the best-performing stocks this year is none other than McDonald's (MCD), and with that big burden comes higher expectations for management.
The story of McDonald's, now, is different than earlier in the year -- when CEO Don Thompson exited the company and current CEO Steve Easterbrook took the mantle. Despite same-restaurant sales in the U.S. that are lagging most of the fast-food industry, Easterbrook has managed to change the narrative on the burger giant.
Talking Points from CEO Easterbrook
The food is being made better than before. For example, a McDonald's hamburger bun is being toasted 22 seconds longer than at this point last year. Note that McDonald's buns are still under-toasted, in my opinion -- and the company overuses condiments, which turns the bread soggy. But, I digress.
McDonald's service is better than before. I don't know how franchise owners are inspiring workers to be kinder to guests, considering the debate on low pay, but I have noticed the change. Friendliness is greatly improved under Easterbrook's leadership.
Being media friendly is a completely different ball game: I continue to be disappointed by the access to executives, which I believe could tell a better story to journalists. Frankly, how McDonald's keeps the majority of media out is discomforting, given the company's importance to society. Memo to the communications team: not every journalist has an axe to grind and hates Big Macs. Some, such as yours truly, would like to tell a story of how progress is being made at the company, and what the future holds. Whether one likes it or not, McDonald's will have a hand in shaping how the next generation eats food. The position that McDonald's doesn't have to do interviews is unacceptable, in my book.
Easterbrook has signaled to Wall Street that he is not completed wedded to McDonald's history, and is willing to take some bold actions for the good of shareholders. Nothing wrong with that -- it has been a while since McDonald's has tossed an olive branch to investors.
There is a sense that franchisees are relatively content with Easterbrook, and are working harder than ever before to buy into his turnaround plan...because if he wins, they all win. Poor relations between McDonald's franchisees and McDonald's have existed for years, but that is changing as the company has put more power in the hands of franchises in terms of menu editing and promotional cadence.
Given the many improvements under Easterbrook within a year, and the stock's advance, Easterbrook's job now is to keep moving the narrative forward to justify a company that will be hard-pressed to deliver 5% to 7% operating income growth in 2016. And if he doesn't move the narrative forward, the stock deserves to cool down a bit -- much to the disappointment of McDonald's fans on Twitter, who generally have no clue how the stock market works and why it's important for the Golden Arches to focus on shareholders -- alongside crispier burger buns.
The latest key event for McDonald's, its investor day on Tuesday November 10, was a mixed bag for Easterbrook and his team: Some good news, some less-than-flattering news. Overall, I think McDonald's shares deserve to trade sideways into the next earnings report.
Grading the Company's Performance
Moving the Narrative Forward: B-
McDonald's has announced that it will be refranchising 500 more restaurants than it outlined months earlier. That should help the company's bottom line, as firm-operated restaurants are more expensive to run. However, McDonald's didn't hit investors with more aggressive expense cut plans, specific details on what it's doing to improve ingredient quality (although management did release some hints), or insight into the demand for burgers and fries.
But demand seemed weak, with overall sales improvement in the U.S. simply being fueled by all-day breakfast availability. This platform was not available last year, so the numbers benefit. I do think McDonald's will launch a new national-value program within the next three months, but it may be more regionally focused than investors expect -- so no TV commercials for a month offering multiple-dollar menu items to drive traffic: this is no longer 2005.
Trust in the Management Team: B+
Easterbrook earns high marks from me. Although I still think he is leading a long-term sinking ship, he is of good character, generally loves the company and has shown an ability to break down problems into pieces and develop a strategy to improve. Furthermore, he seems to have the confidence of franchisees and the executive team, which I don't think was the case with prior CEO Don Thompson.
The reason McDonald's didn't score an A, here, is because the company should have announced a more-shareholder friendly approach to driving value from its lucrative real estate. Certainly, I understand the company's hesitance to do a REIT, and the rigorous review it undertook to decide not form one, but McDonald's has a unique opportunity to be more shareholder friendly, with this.
Additionally, I am not a fan of the company levering up its balance sheet to repurchase shares, which is what triggered a cut in its credit rating by Standard & Poor's. When I see things like this, or the lack of aggressive thinking generally, it makes me concerned about whether management has the best interests of shareholders, at heart.
Strategies in Place to Thwart Rivals: F
Burger King (BKW) is killing it. Sonic (SONC) is rocking. Wendy's (WEN) is doing well. Better burger joints such as Shake Shack (SHAK) are blowing the doors off same-store sales estimates and grabbing up very attractive real estate, globally. Yet here is McDonald's, focusing on a buttermilk chicken sandwich that is, in my opinion, below the quality levels of those offered at Chic-Fil-A, Shake Shack, and Wendy's. There are still sirloin burgers available in most locations, but they haven't sold very well since their launch this period.
The menu itself has been pared back aggressively to improve execution -- so when you walk into a McDonald's, your eyes will be drawn to big photos of a Big Mac or Egg McMuffin. And, based on my experiences, McDonald's is now only carrying a single salad on the menu. Easterbrook touted the ongoing rollout of capabilities to make your own burger on a giant touchscreen device. That's great, but how about some menu innovation -- true innovation, not just spruced up versions of items that were on the menu 10 years ago.
McDonald's has to regrow guest counts in the U.S., and a key ingredient in doing so is to create a product that captivates the nation, as the Big Mac did eons ago. The company has to have a hand in dictating what is new and cool: Many people have no desire to visit a McDonald's -- even to make their own burger, because they haven't visited the chain in years. Once that cool item is created, it's up to McDonald's to market the heck out of it in order to reestablish the chain as a place where a 30-year-old would want to visit frequently, instead of once a year -- if at all.
Two Photos that Demonstrate McDonald's Food-Quality Concerns
Excessive condiment use on Steakhouse Sirloin Burger bun.
McDonald's continues to be heavy-handed with its condiments use, something that is not really being seen at rivals. This may be to mask what is, in my opinion, under-seasoned beef and chicken. First, overuse of condiment is inefficient. Second, it causes soggy burger buns, which lowers the quality of the overall experience.
Poor-quality cheese product on an Egg McMuffin.
I don't know what kind of American cheese McDonald's uses, but it is my considered opinion that high-quality cheese should not look like the above photo shortly after the order is served up. Bottom line: the quality of each individual ingredient needs to be raised. We have not received details on when this will happen.
Photo source: @BrianSozzi