One of the concerns we have expressed about MCD for roughly a year now is that self-inflicted wounds are taking a toll on operations and, as a result, speed of service. This has been a factor behind the decline in the core business.
An article in today’s WSJ titled, “McDonald's Tackles Repair of 'Broken' Service” effectively confirms our thesis.
Our bearish bias in 2013 has been wrong with MCD up 15.1% year-to-date versus the S&P 500 up 11.4%. We don’t see any need to change our thesis at this time. Today’s article in the WSJ, coupled with the company’s recent admission that they have a millennial problem, suggests that a snap back in sales is unlikely.
As we have discussed in prior notes, the Street is anticipating an inflection point in McDonald’s sales trends in 2013. In late 2003, the aggressive push for positive comparable sales growth via the dollar menu did not fix the underlying problems with the business. The 2013 rehash of this strategy is also unlikely to work. Sustainable top line growth will be achieved through driving efficiency in the stores, and clearly MCD still has issues to address. Changes in service standards require training and investment and don’t happen overnight. As a result, addressing the current operational issues will have a negative impact McOpCo store-level margins and franchisee cash flow.