Why Things Aren't Looking Up For McDonald's Anytime Soon

| About: McDonald's Corporation (MCD)


McDonald's same-store sales continue to slide in the U.S.

The company has a plan in place to reverse the decline, but results have yet to show in the quarterly performance.

MCD made it through a similar struggle a decade ago, but there are other factors in play this time around.

If investors take away just two things from McDonald's (NYSE: MCD) latest quarter, here's what they should be:

  1. The company is confident in the plan it has in place to turn around its slumping sales, particularly in the U.S.

  2. That plan is going to take a while to start showing real results.

Company executives hammered those two points over and over during the July 22 conference call, leaving little doubt about how they see the short-term and long-term prospects of the world's favorite fast-food eatery.

There was no cheery talk about the quarter to come. In fact, management suggested a time frame for tangible results at 12-18 months.

"We're moving with a sense of urgency, but recognize that it will take time to see the results of our actions," CEO Don Thompson said. "... it takes time to enact changes in the restaurant and time for customers to notice the changes we've made and reward us with more visits."

While management noted that they "have not given up on 2014," the company is bracing investors for more of the same for the remainder of the year. That means investors should expect flat-to-shrinking U.S. same-store sales for the months to come - and only modest growth internationally.

Fortifying the base
The Golden Arches are still doing plenty of business - quarterly revenue came in just shy of $7.2 billion. But the fast-food chain has fallen out of favor with many customers, especially those in the U.S., where comparable-store sales were down in June by a very unappetizing 3.5%.

The company is trying to right things by getting back to marketing its most popular items, improving its service, and expanding its menu in a way that makes more sense and gives customers more fresh ingredients to choose from and the ability to customize orders to suit their tastses. But with more than 35,000 stores worldwide - and most of those franchised - what McDonald's is doing is turning around the proverbial massive ship.

"In the shorter term, what we're looking for is to fortify the base - the foundation - of McDonald's today so that we're ready for those growth opportunities," Thompson said.

A look back at a similar turnaround
McDonald's has been through this before. It had a rough 13 months in 2002-2003 that The Wall Street Journal has drawn comparisons to. In fact, WSJ suggested last month that this rough patch is not as rough as the one a decade ago. Indeed, McDonald's today still generated more than $4 billion in operating income over the first six months of 2014.

In 2003, McDonald's turned itself around, in part, by "getting back to the basics" and focusing on food quality, WSJ reported. That sounds a lot like one of the key pillars of McDonald's plans for the current troubles.

A growing movement
But McDonald's is also facing a big problem that it wasn't facing 11 years ago: the rise of healthy eating and competitors like Chipotle Mexican Grill (NYSE: CMG), who are capitalizing on it at the Golden Arches' expense. Chipotle has made its message of "Food With Integrity" key to its marketing efforts. It promotes natural, healthful food sourced as close to home as possible.

"We believe that the more people understand these issues, the more they will make better choices about the food that they eat," Chipotle Co-CEO Steve Ells said after the company's recent killer quarter. So far, Ells and company have been dead-on in that assessment.

In positioning itself as the anti-fast-food inside the fast-food industry, Chipotle's growth is exploding. Quarterly revenue was up 28.6%, and same-store sales were up a lip-smacking 17.3% over the prior-year quarter.

That's a testament to the success of Chipotle's message as much as the quality of its food.

McDonald's, meanwhile, sits on the other side of that message - one of the unnamed targets of the industrial food complex that Chipotle fires away at in its "Farmed and Dangerous" sitcom and "Scarecrow" video game.

Thompson admitted that the problems and the slow progress on turning around have left him not sleeping so well at night. He has good reason to toss and turn. Because this time, it might not be just about getting back to what McDonald's has historically done well. And it looks like investors won't know for sure for at least another 12-18 months.

Patient investors may be willing to hold McDonald's and collect the 3.44% dividend, but with a long time frame expected on a possible turnaround and significant headwinds that seem to be only picking up steam, there are better places to put your money.

Disclosure: The author is long CMG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.