McDonald’s (MCD) is on the Hedgeye Restaurants Best Ideas list as a LONG.
Bottom line - getting more bullish as the dog days of summer press on.
Initiatives across the company are all starting to click. A few more things such as a national value message, further simplification and ADB need to be figured out but this ship is in gear and headed north. We still strongly believe that the inflection point will be Q3 and that 2015 will be the last time MCD trades below $100 per share.
Yesterday we spoke with McDonald’s to try to get a better read on how the turnaround is going. The feedback they are getting from investors are that people are feeling better about the business outside of the U.S., in markets like China as they lap the supplier issue. People are encouraged by the Europe segment, recognizing that France and Russia have had their issues. It is clear to all that the center piece of the turnaround will be dependent on the U.S. recovery. Coming out of this conversation we are confident in our 3Q15 inflection point and that the November 10th analyst meeting will have a lot of substance, and provide investors with a better road map for the USA recovery.
MCD admitted to the fact that they have given up share on the value offerings and that value is a pillar to MCD’s foundation and they need to defend their turf. They are encouraged that the franchisees’ thinking has evolved, from the beginning of the year when they didn’t want a national value platform to June where they approved national price point value. The $2.50 McDouble and small fries deal underperformed in the first few weeks, due to marketing and execution issues but those are being addressed and demand is improving. The current value promotion is an LTO and will be rolled off at the end of the summer; they are working on a longer-term national value offering.
Some local markets are providing more value; certain Florida locations are running $1.39 and $1.49 10 piece nuggets to combat Burger King. Seattle is going after dollar any size drinks. Bottom line, value is key to MCD’s success, and from what we heard they are well on their way to figuring out a long-term national solution, they are just not quite ready to share it publicly.
Yesterday, we learned that McDonald’s CEO, Steve Easterbrook, got up last week in front of U.S. owner and operators, urging them to basically get their act together. Saying that we restructured our entire business in less than two months but you guys cannot agree on and approve a national marketing message over the same time period.
Traditionally, McDonald’s has existed as a culture of consensus building, and that everyone needs a voice, Steve is moving away from this process and wants things done faster. The new CEO is pushing people across the organization to move with more speed and urgency. We are very encouraged by what we are hearing and believe that MCD has the right CEO in place to succeed.
THE REORGANIZATION IS CRITICAL
The reorganization of the business is going to provide a great benefit, aligning the business by like markets versus geography was a big change. By doing this, management created greater focus on the most important regions. For instance, Doug Goare, President of International Lead Markets used to be the President of Europe in which he ran 40 markets and managed roughly 100 people. Now he oversees five markets and has about three to four people supporting him. This is a big change to the business model, but now he is no longer distracted by less important markets, his time is freed up to focus on what is important to the company.
McDonald’s management isn’t settling for just $300mm in savings, they are trying to find efficiencies in the way they operate that is not customer facing, trying to minimize the impact to customers. As we called out in our MCD Black Book, we expected them to look beyond the $300mm, and they are doing exactly that which is promising to hear. We expect we will hear more about this at the November 10th analyst meeting.
THE SILVER BULLET - ALL DAY BREAKFAST (ADB)
Tests in San Francisco are encouraging and they are expanding tests to biscuit and muffin markets (mainly across the south), as they would have to offer one or the other. Obviously ADB will add greater complexity, and Steve’s goal is to have net reduction in complexity, so teams are working on different kitchen configurations to reduce the complexity. At the end of the day operators will be the ones to determine if they will move forward with ADB, but ADB continues to be the number one requested item by customers. We recently took a survey on whether people would go to MCD more often if they could get breakfast for lunch. The results were good, 33.3% of people said they would go more often, ADB looks to be the silver bullet and could catapult MCD to growth, but we don’t view it as a necessity.
PLAN FOR NOVEMBER 10TH MEETING
Management is viewing this meeting as an opportunity to provide an update on the turnaround plan, what 2016 will look like, as well as financial areas of opportunity. Additionally, a logical person would probably think that they will cover longer term growth opportunities, as they have done in the past.