Feed the Masses, Live With The Classes: How McDonald's Has Weathered The Recession

Includes: CBRL, MCD, QSR, WEN, YUM
by: Glen S. Woods

There was an old saying told to me when I first started in business: "Feed the classes, live with the masses; feed the masses, live with the classes." That adage has served me well over the years and still rings true today, especially during the recent recession and the slow recovery. Consumers have cut their budgets, made do with less, and chosen less expensive restaurants as their dining destinations -- otherwise known as "eating down." The recession has affected all parts of the food system: farmers and ranchers, food processors, grocers, restaurateurs, and diners. The National Restaurant Association reported declines in sales and customer traffic levels. Nearly two thirds of restaurant operators reported lower sales in the first year of the recession. In 2009 and 2010, restaurants experienced eight consecutive quarters of declining traffic, a trend unseen in a generation. While the numbers turned positive in early 2011, few industry veterans foresee a 2012 rush. Companies such as McDonald's (NYSE:MCD), Burger King (BKW), Wendy's (NYSE:WEN), and Yum! Brands (NYSE:YUM), which include KFC and Taco Bell, adopted new strategies to lure the masses to the seats and the drive through windows. They've added "dollar menus," premium burgers, salads, and premium coffees to their arsenal. Full-service restaurants have seen the consumer trade down to quick-service operations. The full-service operators whose menus are at the lower end of the scale have seen the consumers turn away from them in favor of fast-casual options, where they can enjoy food options that are just as good, if not better --and quicker, without the added expense of paying a tip. Subway's CEO, Fred DeLuca, stated in an interview in "Entrepreneur" that much of the company's success is due to two things: the franchise's popular $5 deal on foot-long subs, and consumers' desire for healthful foods. Fast casuals that blend quick service with the food expectations of casual dining continue to be a favorite of Gen Y, many of whom are entering their prime dining-out years.

McDonald's Corp., with 33,000 restaurants worldwide, continues to feed the masses. It has shown that it was not only recession proof, but was also a great buy (the stock rose over 83% since the beginning of the recession in 2007). The question is, is there more room to grow? MCD, with a $91.4 billion market cap, hit a yearly high of $102.00 per share, but has given back just under 10% in the past six months and is trading around $90.00 per share. The company pays a dividend of $2.80 annually and has a dividend payout ratio of 50.28%. The stock maintains an annual dividend yield of 3.14%. MCD has not been just about selling burgers and fries; in 2009, it opened its McCafé and grew its coffee sales from 2% to 6%. In 2010, MCD added McCafé Frappés, the chain's blended drink to compete against Starbucks Coffee's (NASDAQ:SBUX) Frappuccino. MCD continues its advancement into new global markets, Europe, Asia, and other emerging markets, which has been its main avenue of growth. However, with the world's economic slowdown, it has seen a 1.7% decline in same store sales from last year in its Asian, Middle East, and African regions, while same store sales in the United States rose 4.4%, and in Europe it rose 2.9% - coming in higher than analyst expectations. MCD announced on Tuesday Sept. 4th it was going to open its first all vegetarian restaurants in Amritsar and Katra, India; both cities are central to India's Sikh and Hindu communities. McDonald's historically has struggled to establish a foothold in India ever since the first store was opened there in 1996. However, opening a vegetarian restaurant in a heavily vegetarian country shows that MCD, once again, is not just hamburgers and fries, but a company that is willing to test and take calculated risks with their product to meet the demands of consumers worldwide.

In looking at MCD and its competition, one has to realize the burger wars are over - McDonald's won. The question is, as MCD continues to build a presence in Asia and other global markets, will the stock continue to grow for the investors? I think that MCD is a strong company that has done an excellent job in keeping its core business while expanding out for new customers around the world, and that MCD, at $90.00 a share, is a good buy.

Wendy's, also known as The Wendy's Company, with 6,500 franchise and company restaurants in the U.S. and 27 countries worldwide, is the 3rd largest quick service hamburger company in the world. It has a market cap of $1.74 billion. The stock has been in a holding pattern as of late, circling in the $4.00 to $5.00 range for much of the year. However, things may be changing. Chief marketing officer, Craig Bahner, plans to pursue an aggressive course to raise the company's visibility and attract new customers by revamping its menu, adding new products, and increasing marketing to the growing Latino community. Mr. Bahner spoke to analysts at Wendy's Investors Day program on June 28 noting that Wendy's needs bolder menu innovations that are "compelling, distinctive and own-able," including what he called "step change" items that "create new [menu] categories in which we're not competing." These include the Grilled Flatbread Chicken Sandwiches that Wendy's has been testing widely since December. The company is also planning to restructure its value menu and introduce a line of Signature Lemonades countering MCD and Burger King smoothies and shakes. Mr. Bahner pointed out that Wendy's has "lost relevance" with consumers in recent years through "inconsistency in menu and messaging" that essentially told consumers "We don't even know who we are." That is being corrected through current advertising.

Are these changes for Wendy's going to propel the company forward? Somebody thinks so. Scott Weisberg, the Chief People Officer at The Wendy's Company (yes that is actually his title), purchased 20,000 shares of WEN, worth more than $80,000, with an average purchase price of $4.32. The company disappointed investors in its second-quarter earnings release last month, where it posted a loss of $5.5 million, compared to a profit of $11.3 million in Q2 of 2011. Now, adjusted earnings did meet expectations at $0.05 a share, but quarterly revenues ($645.9M) missed targets ($647.0M). Will Wendy's restructuring its restaurant menu bring people in the doors and raise profits? In the short run, perhaps, thus making it a decent longshot-bet for the stock to rise. However, Wendy's has shown over the years in the burger wars it comes up short; and I don't see anything on the horizon that would make Wendy's a long-term hold.

Cracker Barrel (NASDAQ:CBRL), a full service casual dining restaurant, after a number of dismal years where it saw its stock dip down below $38.00 a share, has bounced back strongly. In the past twelve months, investors have seen the stock rise over 58% to a yearly high of $64.95 per share. Cracker Barrel seems to have found a niche creating an atmosphere of an old country store and restaurant where diners can relax and enjoy a more home-style food experience. Cracker Barrel reported fiscal third-quarter earnings above analyst estimates, as more customers frequented the casual dining chain despite higher prices. For the third quarter, the company's earnings rose to $19 million, or $0.81 in EPS, from $15.2 million, or $0.64 in EPS, a year earlier. Excluding severance and other charges related to restructuring, the company posted earnings of $0.86, beating analyst estimates of $0.75 in EPS. Revenue rose 4.5% to $608.5 million. Cracker Barrel expects total revenue for fiscal 2012 to be between $2.55 billion and $2.6 billion, reflecting anticipated increases in comparable restaurant sales of 1% and 2%. The company has raised fiscal 2012 earnings guidance and now expects to report adjusted EPS of between $4.20 and $4.35. Because of positive trends in sales and traffic at its restaurants, Cracker Barrel raised its dividend 60% to $0.40 per share from $0.25 per share in April 2012. President and CEO, Sandy Cochran, calls the pressures on consumers "enormous." Given labor uncertainty and tightening household incomes, she believes consumers will be even more focused on value and price in 2012. "Consumers only have so much money in absolute dollars for discretionary spending. And, relatively speaking … it's likely that value perceptions have been altered."

With Cracker Barrel close to its 52-week high, the question remains: is there room for the stock to grow? According to its website, "The company has identified approximately 500 trade areas for potential future development with characteristics that appear to be consistent with those believed to be necessary to support a successful Cracker Barrel unit." Some of these would be off-interstate locations, (16% of their locations are off-interstates). In fiscal 2012, Cracker Barrel plans to open 13 new stores. My conclusion is that if one owns the stock, hold it. For the ones considering, I'd wait and buy on the dips. However, whether you buy the stock or not, I personally recommend their wonderful buttermilk pancakes smothered in hot syrup.

Chicago-based research firm, Technomic, in its latest industry forecast for full-service restaurants, predicts 2.5% nominal growth and zero real growth in 2012. The NPD Group shares a similarly brooding forecast: Restaurant industry traffic will be positive, but still weak. NPD puts 2012 check growth at 1.4% and traffic growth at 0.7%. Many point to the nation's lingering 9% unemployment rate and the election as two primary reasons restaurant numbers will remain flat. Few see unemployment rates declining or U.S. legislators enacting a major fiscal stimulus to jumpstart growth. "There's a close relationship between consumer confidence and restaurant traffic. Until we see that confidence improve, we're not going to see much of anything change," NPD Group restaurant analyst, Bonnie Riggs, says adding that her agency holds a tempered outlook for the next decade, given restaurant traffic's struggles to keep pace with population growth.

So what separates companies like McDonald's and Cracker Barrel from the others? While it's doubtful that the words "my compliments to the chef" have ever been uttered in a McDonald's, they do offer something that it seems like the other fast food companies do not… consistency. When one goes into a MCD, they know what they're going to get; though the menu has been enhanced, the core items haven't changed. Cracker Barrel, Subway, and Starbucks can claim the same thing, consistency. That cannot be said about most of the other chains, and that's one of the intrinsic reasons that those that have stayed consistent over the years continue to be successful. However, when it comes to which stock would be the best all-around investment, McDonald's seems to come up ahead of the pack.

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.