A month ago, McDonald’s (NYSE:MCD) new chief executive Steve Easterbrook made a hotly anticipated announcement regarding the direction the company will be taking. As we wrote about it, it seemed as if it was something investors should be happy about. But with a little bit of hindsight, it seems as if this is going to be a long ride for McDonald’s faithful.
Investors are wary
McDonald’s shares have been flat on the year, gaining only 1% since January. Of course, there have been peaks and valleys throughout the year. But that has simply been proof that investors don’t really know what to do with the company.
On one hand, it seems as if the company is making efforts for a turnaround. Easterbrook’s announcement regarding the turnaround seems to be focused on corporate restructuring, which is something that management actually has control over. There are, however, also menu changes that the company is attempting to put into effect that could potentially bring in more customers.
The problem, though, is that it’s not working right now. The company announced May comparable sales earlier this month and it didn’t look pretty. The United States saw comp sales decrease by 2.2%, while Asia/Pacific, Middle East and Africa (APMEA) was down 3.2%. The only seemingly bright spot was that Europe sales were up 2.3%.
The consensus for U.S. May sales was 1.7%, which isn’t good news. As McDonald’s is working to change its menu, it must be sure to not fall behind its competitors again in innovation and health. APMEA is still a wild card at this point. With the recent scandals in China and Japan, it may still take months for customers there to feel comfortable with the fast food giant again.
As for Europe, this is good news. It shows that McDonald’s does have signs of green shoots somewhere. This is encouraging to see the market finally stabilizing for McDonald’s. The only problem is that Europe represents a small portion of the company’s business. So while growth in the area is great to see, it isn’t enough to cancel out the losses in the United States and APMEA.
Why is McDonald’s still attractive?
That’s a good question. For all intents and purposes, the company is struggling. So why invest? First of all, many bulls have described McDonald’s as a “dividend aristocrat.” These companies are cash cows. They don’t spend much money on new investments, so a lot of their free cash flow goes to dividends. Currently, McDonald’s has a 3.6% dividend yield, putting it in the same arena as Coca-Cola (KO), General Mills (GIS) and Proctor & Gamble (PG)
On top of that, McDonald’s is still the leader in the fast food market. As one example, take competitor Chipotle Mexican Grill. Though many investors pit these two together as the healthy vs. unhealthy alternatives competing for Millennials’ money, McDonald’s is far bigger. In 2014 alone, McDonald’s raked in $27.44 billion in revenues. Chipotle (CMG), on the other hand, managed $4.1 billion. Even Yum Brands (YUM), which has subsidiaries Kentucky Fried Chicken, Pizza Hut and Taco Bell, generated only $13.28 billion in revenues last year.
Suffice it to say that McDonald’s isn’t going anywhere anytime soon. Though it may take a while for a turnaround to happen, it’s unlikely that a competitor will overtake it as the industry’s top restaurant chain for years to come.
This is obviously great news for McDonald’s, because time is exactly what the company needs. So far, it seems as if Easterbrook’s plan revolves around a lot of corporate restructuring and public relations. But there are also some significant menu changes that can help revitalize the top line. It will just take a little longer than we first expected it to.
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