Investors have been eagerly waiting for McDonald's (MCD, Financial) to chalk out and implement different stages of the turnaround plan and if the stock price served as an indicator, there seems to be positive news on the horizon for McDonald's. In the last month, the stock has surged by 5.2%. While I had discussed the second quarter results and the positives in the results and management commentary, this article discusses the recent factors that can change fortunes for McDonald's.
Coming to the first point that serves as a positive for McDonald's, it was reported by Bloomberg yesterday that Mike Andres, McDonald's president for the U.S., recently made to franchisees and muffin-based sandwiches all day can help McDonald's stores increase sales by 2.5%. In addition, the article also points out that restaurants that opt to sell biscuit sandwiches may increase sales by 1.9%. Since these estimates are based on test results, there is a reason to be bullish once all-day breakfast is introduced.
The introduction of all-day breakfast will be gradual across the U.S. and an immediate impact on comparable restaurant sales is unlikely. However, as this plan is introduced, the comparable restaurant sales in the U.S. are likely to witness reversal. In addition, when McDonald's last reported comparable restaurant sales in May 2015, the company’s sales in Europe were higher by 2.3%. If the positive trend in Europe sustains, McDonald's is likely to witness positive comparable restaurant sales in U.S. and Europe 2-3 quarters down the line.
While McDonald's will have to continue with menu simplification and higher level of customer service to maintain positive comparable sales, the next front that the company will have to work after U.S. and Europe is Asia Pacific. From a long-term perspective, the region is important and May 2015 comparable restaurant sales decline of 3.2% remains worrying.
A part of the decline in Asia Pacific sales can be attributed to recent sourcing problems in China. However, I expect McDonald's to tweak its Asia Pacific menu as well to match the local taste requirements besides the quality factor. In addition to China, India is a big market that still needs to be penetrated for McDonald's. India is not expected to become a near-term growth driver, but the market has the potential to drive long-term comparable restaurant sales growth in Asia Pacific.
Another challenge for McDonald's is franchisee satisfaction level, which seems to have declined in the recent past. While the franchise survey size was small, I believe that McDonald's is already addressing this problem, and I see more franchise and management interaction in the coming quarters. This will help build communication and help address issues faced by the franchisees.
Overall, it is clear that the company’s management has ensured that they address all the problems that have impacted the company’s growth trajectory. I don’t expect recovery for McDonald's to be very swift, but investors will be satisfied as long as the company is moving in the right direction and the results are gradually showing. I expect that to happen from 3Q15 onwards and the stock seems to be discounting the positives.
I must mention here that I don’t expect big stock upside. However, McDonald's is not a growth stock, but a dividend stock. I therefore expect major value creation to happen by the way of robust dividends and continued share repurchase.
