THE HEDGEYE EDGE
McDonald’s is perceived to be a safe haven in difficult economic times. However, four of its five largest markets are under siege by COVID-19 shutdowns. The company has said 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." The International Operated segment comped down 70% in April while the US comped down 25%.
Comps in China which were the first to be impacted have improved about 10% points from Q1. Closed restaurants and restaurants without drive throughs are having the slowest recovery two characteristics common in the International Operated Markets. If other countries were to see a similar recovery as China consensus EPS estimates are much too high.
For decades the investment case for MCD was 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, but now 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.
Franchisees are burning cash in the current environment. Even in a projected period of recovery franchisees will struggle to meet additional costs and debt payments as seen in the franchisee business model below.
Franchisees have lost confidence in new CEO Chris Kempczinski, who has only been in the role for the past six months. McDonalds is allowing franchisees to delay April rent payments and for the worst impacted restaurants to also delay additional months extending $900M in liquidity to franchisees. McDonalds is not helping to support hazard pay, extended sick leave, the additional costs for safety/cleaning, or forgiving rent.
By not taking the extra step, the CEO is only hurting the franchisee's cash position further. Franchisees will cut costs and delay investments well beyond the current environment in order to be made whole. Franchisees are also in open opposition to some of management’s mandates which will poison future collaboration. This will ultimately tarnish the McDonald’s brand!
