MCD remains on the Hedgeye Best Ideas list as a short.
To be clear, we believe MCD has a secular top line issue and not a cyclical one. That said, we don’t believe management is willing to acknowledge this. So far in 2013, the new product pipeline has failed to stimulate incremental customer traffic and new products, such as Mighty Wings, seem like a desperate attempt to hide from reality.
We posted a note a couple of weeks ago titled, “MCD: A Pending Mighty Disaster,” in which we stated that MCD’s decision to sell wings this fall could be disastrous for the company. Given current trends, we have no reason to back off this negative bias.
We have three main issues with the current MCD menu strategy:
- Mighty Wings will not enhance the McDonald’s brand (Premium Wraps have not helped either)!
- Both new products (Mighty Wings and Premium Wraps) have slow service times.
- Adding new products to an already complex menu is the wrong direction for the company to go.
We also have two main issues with the Mighty Wings promotion:
Mighty Wings Are Too Expensive
For the smallest portion, you are paying a dollar per mighty wing.
McDonald’s Mighty Wings are available in three portion sizes. There is a 3-piece for $2.99, a 5-piece for $4.79 and a 10-piece for $8.99. Across the pricing spectrum, this is equivalent to paying $0.99, $0.96, and $0.90 per wing, respectively.
Inconsistent Product From McDonald's
We are hearing that frequent visitors of McDonald’s are not used to the bone-in chicken wings product. While bone-in chicken wings are standard fast food options for restaurants that specialize in fried chicken – for example, KFC and Popeyes – it does not seem to fit well with the rest of McDonald’s products.
This whole situation is all too reminiscent of the period from 1, when we witnessed the sad decline of a mismanaged McDonald’s brand. During that time, the company was focused on unit growth and cost reduction rather than driving high margin, top line sales.
As the image of the brand began deteriorating, management failed to invest in the brand and customer experience. Rather, they turned to monthly promotional tactics in order to drive short-term sales at the expense of brand equity and margins. This strategy did not end well for either the company or investors and we’d be surprised if this time was any different.
We continue to believe there is a disconnect between investors’ expectations and the company’s fundamentals. As long as this remains the case, we are looking for more underperformance versus both peer consumer and S&P 500 benchmarks.