It's only been 143 days since Chris Kempczinski has been CEO of McDonald's. Mr. Kempczinski joined the global strategy team in late 2015 and was promoted to president of McDonald's USA in October 2016 and became CEO in November 2019. Chris K has never held a position outside the U.S., and now he is dealing with a crisis that is paralyzing the company. I would not wish this on anybody and genuinely wish he, McDonald's and the 850,000 employees all the strength to get through this.
For decades the investment case for MCD that it was the largest landlord in the U.S.! It leases the land, the buildings, or both on a significant markup to over 13,000 restaurants in the U.S. and a good portion of the 36,000 restaurants internationally. Today the investment case for MCD is that it's the largest landlord in the world, and nobody can pay the rent! Not to mention that 15% of the company's units are closed globally, with the rest of the system operating on limited hours.
Here is a recap of what MCD said yesterday:
- The global pandemic resulting from the outbreak of the novel coronavirus ("COVID-19") has disrupted the McDonald's global restaurant operations beginning in early 2020.
- Substantially all of our restaurants in the United States are operating Drive-thru, Delivery & Takeaway only, sometimes with limited hours, menus and capacity.
- Several markets (including France, Italy, Spain, and the United Kingdom) have closed all restaurants, and most other International Operated Markets have limited operations, including limited hours and/or limited capacity.
- Local governmental restrictions and public perceptions of the risks associated with the COVID-19 pandemic have caused consumers to avoid public gatherings and social interactions. They may continue to cause consumers to avoid or limit gatherings in public places or social interactions, which could continue to affect our business adversely.
- Besides, our ability to maintain our supply chain and labor force may become challenging as a result of the COVID-19 pandemic.
- We cannot predict the duration or scope of the COVID-19 pandemic or when operations will return to full service.
- We expect the COVID-19 pandemic to impact our financial results negatively and such impact could be material to our financial results, condition, and prospects based on its longevity and severity.
The company also announced in the U.S. that it is shrinking its menu to focus on the core products people go to MCD for and stopping all-day breakfast! All of this is a net positive for operations and taking pressure off the supply chain.
The cost of all this will be staggering for the company. In the U.S., approximately 13,100 stores are averaging $2.9 million in average unit volumes. If the average rent that McDonald's charges is 10.5% of sales, that implies $280 thousand in rent per store or $307 million total per month. Add to that the 4% royalty, and it's another $116 million per month for a total $423 million in monthly franchisee assistance the company is looking at paying. Given this is happening all around the world, you can likely double that number to see what the company would be paying in monthly franchisee support. Understanding the franchise is ultimately responsible for repaying the company, the company's current cash flow is significantly impaired before we get to the impact of lost sales.
On March 16, we wrote that a "1% change in comparable sales for either the U.S. and or the International Operated segment would change annual diluted earnings per share by about $0.06 -$0.07." If we are looking at MCD 1Q20 global same-store sales going from up 4.6% to down 10-15%, MCD could miss 1Q20 earnings by $0.75-$1.00, with consensus estimates currently at $1.90."
Now, the useless consensus estimates are $1.70, and global same-store sales are down more like 25-30%, suggesting that MCD might breakeven in 1Q20. The decline in profitability implies another $1.2-$1.5 billion hit to operating cash flow.
All of these numbers are before the benefits of the stimulus bill and the potential change in the tax code. The most critical issue facing McDonald's and every restaurant company is the overall impact on consumer spending on the restaurant industry.
Howard Penney
Managing Director
