McDonald's: Still the Big Mac

McDonald’s (MCD) is the largest fast-food restaurant chain in the world. It has 32,000 stores that serve 58 million customers daily in 118 countries. Most stores are operated by franchisees from which the company derives licensing fees and royalties. MCD directly owns and operates 6,500 stores.

Perhaps surprisingly, Europe is the company’s largest geographic market, having produced 42.2% of 2008 revenues, the majority of which came from France, Germany, and the U.K. The U.S. generated 34.3% of revenues. The Asia/Pacific, Middle East and Africa (APMEA) contributed 16.7% of revenues with more than half coming from Australia, China and Japan.

MCD has benefited from lessons learned early this decade. For example, it initially ignored changes in consumer lifestyles and a growing preference for healthier food. However, it has since made significant menu changes. It eliminated the super-size option, offered more premium salads and chicken sandwiches, and provided greater value options. It also initiated better training for employees, extended hours of service, and redesigned stores to appeal to younger consumers. More recently, MCD has been benefiting from strong growth in international markets, particularly in Europe and Asia. It is also profiting from a growing number of customers trading down from higher-priced restaurants due to the worldwide recession.

Total revenues in 2008 were $23.52 billion. A decision to franchise a number of company-owned stores kept the revenue growth rate at just 3.2%. However, comparable store sales growth was 6.9%. The operating profit margin improved 317 basis points to 27.39% boosted by increased sales and a greater mix of higher margin franchise revenues. Net income increased 8.5% to $4.31 billion or $3.76 per share. Although MCD appears to be benefiting from the recession for the time being as previously mentioned, we still consider the recession a significant risk for the business. We also cannot overlook the competition. For example, Starbucks (SBUX) and Dunkin’ Donuts have been aggressively rolling out new breakfast items, which could put a dent in MCD’s enviable breakfast sales. And Subway has been utilizing an aggressive promotional campaign to increase traffic and sales.

Yet MCD continued to perform well even in Q4 as the economy worsened and consumer spending tightened. Comparable store sales grew 7.2% for the quarter on a year-over-year basis. The corresponding figure for January was 7.1%.

Furthermore, MCD has done an excellent job of countering competitive actions by launching new products such as the Southern Style Chicken Sandwich and the McDouble. Specialty coffee products, which are now available in over 7,000 restaurants, should appeal to consumers looking for a cheaper alternative to higher-priced fare from premium providers such as Starbucks.

International initiatives should continue to fuel growth. MCD already has 1,000 stores in China and expects to open another 175 in that country this year. Thanks to consistent profit growth, an investment grade credit rating, and strong cash flows, MCD should have no difficulty funding its growth initiatives. And at a time when many blue chip companies are reducing their dividend payments, MCD actually increased its dividend by a third in December.

Comments

[User 190816:]

after about 6 quarters of reporting since MCD rolled out its "specialty coffees" and coffee bars, we've yet to hear a single data point from the company on the contribution to the business at large.

silence means....? that SBUX and DD aren't feeling any pain, coffee-wise.

Mar 09 09:54 AM

[Patrick Garot:]

Good comment if true, User 190816. I think mgmt did have some platitudes on coffee, but as to data points, they've been scarce.
MCD still a solid stock at current valuations. Forex will hurt them this coming quarter, but I look for huge growth where it counts -- like +5% or more volumes.

Mar 09 03:31 PM

[kris23:]

Good point, user 190816. Although just guessing, I would have to say they have made some contribution as I've slowly seen every McDonalds in my town get a McCafe now and I don't know why they would invest in it if it wasn't doing anything. Anyways, MCD's growing market overseas great for the company and they are really implementing strategies to grow the company in the long-term. Sentiment took a huge drop but is now becoming more bullish www.predictwallstreet.... as investors regain confidence in this company.

Mar 09 03:49 PM

[rlw124:]

Good point, kris23. In 2006, McDonald's entered into a strategic alliance with China's top gas retailer, and 1/4 of their growth in 2008 was in China. Their evident expansion and multiple growth plans is a good indication that most of their revenue sources are profitable, although it may be too early to tell what effect McCafe has had. Also, the fact that the industry comprised 3.9% of GDP in 2008 leads me to believe that McDonalds is only going up.

Mar 24 04:20 PM