THE HEDGEYE EDGE
MCD's business performance has been in decline since 2012. Earlier this year, they began drifting away from their value messaging, taking the small fries off the Dollar Menu in 2H 2012, followed by the McDouble in 2013. The final straw was when they stopped nationally advertising the value message in the beginning of 2015. All of that is now behind us. MCD has new leaders in place.
In addition to new leadership, MCD has reorganized the way it operates. For the first time in its history, the company is aligned by like markets versus geography. This has had the greatest impact on Doug Goare, President of International Lead Markets (he used to be the President of Europe in which he ran 40 markets and managed roughly 100 people.) Goare now oversees five key markets and has about three to four people supporting him. This is a big change to the business model. Goare is no longer distracted by less important markets. His time is freed up to focus on what is critical to the company.
We continue to get more bullish every time we talk to the company, franchisees and/or customers which we have polled via conducting surveys. This ship is in gear and headed north. 2015 will be the last time this stock is below $100.
INTERMEDIATE TERM (TREND) (the next 3 months or more)
Management has brought back the value message with the $2.50 Double Cheese Burger and Fries deal. Although off to a soft start, they have corrected mistakes. This deal is not the final solution; management is still working with franchisees on a more permanent national solution for value.
With all the improvements being made to the food and environment within the MCD restaurants, we continue to believe the inflection point for this stock with be the third quarter of 2015. We expect management to tell investors they see the light at the end of the tunnel and are nearing growth in the U.S. business. Additionally, there is an analyst meeting in November (after the 3Q earnings comes out) where we expect to learn more about cost savings initiatives, receive further updates about the turnaround and management’s guidance for 2016.
LONG TERM (TAIL) (the next 3 years or less)
We are going to be looking at a much different company 1-3 years from now. Urgency has been instilled from the top down by new CEO Steve Easterbrook. He wants more speed and is encouraging people to get things done faster. The food and experience provided to the customer will greatly improve over the coming months as “Experience the Future” is implemented across the system. It won’t be instantaneous though, as MCD has a lot of work to do around changing the perception to bring back customers it may have lost.
Things like All Day Breakfast, responsibly sourced ingredients, and bringing back the value proposition will lead to increased sales and customer satisfaction. While this company is too big to be completely fixed overnight, management has the right plans in place. We are confident in where they are headed.