McDonald's: I'm Lovin' It

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 |  About: McDonald's Corporation (MCD)
by: Steve Simpson Smith

Every day while commuting back from my office, I pass by a huge Golden Arch symbol. Not only do I witness people of different age groups visiting the restaurant, but what I see is a bunch of people, smiling, while entering and exiting the restaurant. Only recently, I have begun to wonder whether I can get the same smile if I invest my money in the McDonald's Corporation (NYSE:MCD). Before analyzing the stock, let's begin with analyzing the company.

Business model

McDonald's is a fast food restaurant company that has been operating in more than 119 countries. Approximately 69 million customers visit the various outlets of this world's largest restaurant chain daily. The company has about 34,000 restaurants spread around the world. Its work force consists of more than 1.7 million workers. The company offers a variety of burgers, french fries, breakfast items, drinks, and desserts on its menu. More recently, the company has expanded its menu and has included wraps, salads, fruits, smoothies, and fish.

The company operates by the corporation (itself), as an affiliate or through franchises. The revenues are generated by the sales in company-operated restaurants, fees and royalties paid by the various franchises, investments in various properties and the rental income accruing from properties rented to various franchises. The company considers regional, international, national and local retailers of food product as its competition.

Know your risks before you invest

According to the latest SEC Filing, the company identifies its capability to remain an important and dependent brand while focusing on increasing sales and profits at the same time. This would be achieved if they focus their energies on 5 main drivers i.e. People, Places, Products, Promotions, and Price. The global priorities, which the company has identified, are to perfect their menu, enhance the customer experience and, to make the brand approachable and reachable.

The company believes that the global and local economic conditions can affect the business strategy and financial health of the company. Furthermore, harsh weather conditions, unforeseen natural disasters, and socio-political disturbances may impact the sales and earnings of the company.

Financial Muscle

As per company's latest quarterly SEC filing, EPS for the second quarter grew by 5% and revenues increased by 4%, compared to the first quarter. The reason for this improvement in the top and bottom lines was a lower effective income tax, higher franchised margin dollars, and lower diluted weighted average shares outstanding. Operating income also increased 2% for the above mentioned period.

The company's global sales increased 1% for the second quarter, while the guest count has decreased 1.2% due to declining informal eating out pattern.

Future Outlook

The company's future growth depends primarily on four main strategies. "Plan to win strategy" combined with enriching the customer experience and improving the accessibility of the company to its customers, will help in enhancing the revenues in the future. Similarly, providing value to its worldwide customer base will also turn out to be beneficial.

The company should continue to focus on its "plan to win" strategy. This strategy includes enhancing the customer experience by focusing individually on product, price, place, promotion, and people. People consist of the company's franchise, their suppliers and their employees. Particular attention should be given by the company to its menu, that too by introducing new / customized products that would suit international markets. Products such as McBites, McWraps, and breakfast menu may be introduced in various international markets. The food offered by the company should be of high quality and great tasting at the same time. Similarly, introducing new salads, fruits, juices, and other healthy nutrients in the menu would help the company as in the recent years; people have become more conscious regarding their health.

Renovation of the company buildings, both interior and exterior, should continue as it would aid in enhancing the customer experience. In 2012, more than 2,400 restaurants were redesigned in order to modernize the dining experience. The cost for redesigns has been proven too costly for their franchises in the recent months. However, this move will help in contributing to the brand value and customer experience in the long-term. In the year 2013, the company is planning to redesign another 800 restaurants in various locations.

In 2012, the company inaugurated 1300 new restaurants globally, which will broaden the accessibility of the company to its customers. They should carry on with this policy and concentrate opening new restaurants in emerging markets.

Click to enlarge

Source: shareholder presentation

This graph clearly depicts the "plan to win" strategy of the company; the shareholder return has increased since its introduction in 2002.

The company should continue providing value to its customers in terms of price, both globally and locally. Previously, promotions like "Value Lunch" in China, "Dollar Menu" in the US, and "Loose Change Menu" in Australia have helped their business. I believe such efforts should be made in the third world countries as the recent global economic conditions have altered the spending habits of the people around the world.

Conclusion

I am bullish on the future of McDonalds as the management is committed towards maintaining the "plan to win" strategy. This strategy has benefited the company since its implementation. Furthermore, the company should continue to enhance its menu, rejuvenate customer experience and expand the accessibility of its restaurants. Additionally, the company should continue expanding its business in new and emerging markets. Finally, introducing promotions (price value related) to different parts of the globe would again prove beneficial for the future of the company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.