KM just shorted MCD again as the stock broke through his $56.37 TREND line.
On the positive side, the stock dividend yields 3.5% and management will likely raise the dividend again in December. The company reassesses its dividend policy once a year. The company will generate over $1.0 billion in FCF (after dividends and capital spending), spending most of it on share repurchase. Valuation is reasonable, trading at 8.5X NTM EV/EBITDA. Lastly, the dollar headwind will become a tailwind in 4Q09. What’s not to like?
I have no problem being short MCD because sales are slowing and it was the only restaurant company on the planet not to see a big benefit from lower food costs in 2009. The company will report 3Q earnings on October 22 and is holding its bi-annual analyst meeting in mid November. Given the severity of the decline in same-store sales, management will likely be on the defensive as it relates to the launch of McCafe – the most expensive new product launch in the company’s history.
From day one, I have contended that this McCafe launch was never going to work because it falls outside of the company’s core competency and does not appeal to McDonald’s core customer. While I thought the product would have some success during the initial launch period, given McDonald’s marketing muscle, even that has not played out. The continued slowdown in the U.S. highlights that MCD’s espresso-based beverage platform is still not working. Additionally, as I have said before, the fact that MCD has said recently that breakfast sales are declining increases my conviction that MCD’s specialty beverage launch will not prove to be the success that investors have anticipated for some time. If the company cannot drive incrementally more specialty beverage sales during the initial months of its national campaign (while offering giveaways) and in the summer months, it will become significantly more difficult going forward.
We will be interested to hear from management more specific, measurable performance metrics on the launch. Specifically, how many McCafe units are the restaurants selling per day relative to the targeted 100 units and what level of incremental sales is being generated relative to the planned $125K per restaurant from the entire beverage rollout. For reference, the company sold about 45-50 McCafe beverages per day in test markets, a level that some franchisees thought was too low to warrant a national rollout.
I’m going to go out on a limb and make up an excuse for MCD executives before they do. Initially, management contended that it needed to get on national TV for the McCafe product to hit full stride. Now, MCD is on TV and it’s still not working. Management will need a new excuse because it is not going to admit defeat just yet. The NEW excuse will be that that the company needs to get the full line of beverages in place before the consumer will be fully aware of all the new beverage products the company is trying to sell.
Also, the all important ROIIC metric that I talk about so often is in a free fall!