Investing Ideas: McDonald’s COMPS Quarter Pounder


MCD

McDonald’s returned $1.6 billion to its shareholders through share repurchases and dividend payments in the second quarter of 2012. Regardless of the reduction in the future assumptions, I consider the main issues facing the company as recurring in nature. I still see McDonald’s as the best restaurant operator having an extraordinary economic moat.
Global comparable-store sales (comps) rose 3.7% in the second quarter, while U.S. sales are up 3.6%, Europe went up 3.8% and Asia/Pacific,Middle East and Africa (APMEA) up with 0.9% which went down from the last quarter of 7.3% as well as last year’s level of 5.6%. MCD’s solution to declining market share in informal eating-out (IEO) industry and slowdown in comps growth, the company started to implement several strategies in each market with main emphasis on extra-value offer. Although, management noted that most of these measures are short-term and could prove detrimental to margins if exercised on a long-term basis, the company still expects these initiatives to dominate the market from late 2012.
COMPS
The market and analysts are not very surprised with decline of sales, as results came in below expected comparable-sales growth with1.8% increase in the U.S., 2.4% increase in Europe, and 1.1% increase in APMEA, as well as expectations of a slower to low-single-digit growth in last quarters of last year. MCD witnessed a 3.7% upside in global comparable sales (comps) for the quarter, lower than the year-ago level of 5.6%. McDonald s global comparable sales continued to remain healthy for the quarter, but were lower than last year.
 
McDonald’s (MCD) recently had a dividend increase, which may be what the stock needs for a boost after suffering throughout 2012 due to mixed same store sales reports and revenue. The new dividend of 77 cents per share will begin from December 2012 payout and possibly until the August 2013 payout. With the payout ratio edging up to close to 60% based on current EPS of $5.32, considering the company’s expected earnings growth of close to 10% per year over the next 5 years and its reputation, investors should feel secure about their dividends.
 
Franchise Strength 
franchise
MCD’s strength is its solid franchisee and affiliate system, which in total operates 80% of the chain. This structure gives the company an allowance resource of rent and royalties during hard economic times with less capital requirement. McDonald’s generates stable cash flow, during these times because of long-term franchisee royalty and rent revenues. These results are even more impressive when considering that the company owns 45% of the land for its restaurants, which is more than $5 billion in land assets, this means that the returns are generated on a higher invested capital base than most franchised restaurant chains. The company owned 45% of the land and about 70% of the buildings for its restaurants at year-end 2011. McDonald’s has a 30-year-plus history of paying cash dividends and repurchasing shares, including $6.0 billion returned to shareholders in 2011. Revenues from company-operated restaurants fell 1% to $4.67 billion while the same from franchise-operated restaurants jumped 2% to $2.24 billion. Total operating income contracted 2% to $2.16 billion.
 
As the world’s largest restaurant chain in terms of system wide sales, the company yields tremendous economies of scale relative to its quick-service restaurant counterparts. MCD can exert a significant amount of bargaining power over its suppliers; most of them owe their existence to McDonald’s, ensuring access to food and other raw materials at predictable, competitive prices. One great thing is The McDonald’s brand is also one of strongest in the world, backed by an unrivaled advertising budget of almost $770 million.
 
In the United States, comps grew 3.6% against 4.5% in the last year’s quarter. In addition, the upside in comps was due to restaurant refurbishments. Operating income for the segment increased 2% during the quarter. Europe saw growth of 3.8% as opposed to 5.9% in the last year’s quarter. The growth was backed by stronger performance in the U.K., France, Germany, and Russia. A great combination of premium as well as value-menu and restaurant reimaging program are responsible for the quarter’s performance. However, operating income for the segment slipped 3%, but was up 8% in constant currency.
 
In APMEA, comparable sales nudged up 0.9% from last year’s quarter of 5.2%. A continued focus on 24 hours options, variety in menu as well as locally relevant items drove the branches. However, operating income declined 2%, but inched up 1% in constant currency.
 
Strong Brand, Products (Menu), Services and Facility
McDonald’s continues to go strong despite an increasingly challenging economy for restaurant operators. Although analysts doubts they can duplicate the almost 1,500 basis points of operating margin expansion it reported during the last five years, still they cannot undermine MCD’s capabilities of generating superior returns on invested capital for long a long term. The company’s unrivaled scale advantages, such as a strong brand, and ample international growth opportunities, earn them a wide economic moat in the restaurant industry.
  • Restaurant productivity dominated the quick-service restaurant industry average of just more than $1 million per location, average trailing-12-month sales of around $2.7 million per restaurant. This can be attributed to brand strength, convenient restaurant locations, and a consistent customer experience globally.
  • Menu innovation also has played a role in McDonald’s productivity. The company has introduced a number of new, margin-accretive products, such as snack wraps and Angus beef burgers, during the last several years. The launch of the company’s beverage initiatives, including the McCafe specialty coffee menu and real fruit smoothies, which exceeded expectations since their launch in the summer 2010 drove reinvigorated market.
  • Exterior and interior restaurant decor upgrades, more-efficient kitchens and drive-thrus, including free wireless Internet access also keep McDonald’s ahead of the competition and help attract massive customer traffic.
  • Engaging marketing campaigns, extended hours, free wireless Internet access, and renovated restaurants have renewed the brand and increased the consumer experience, leading to restaurant traffic increase.
The COMPS in the quarter is heavily patronized by strong customer demand for core offerings like breakfast menu and the McCafe beverage line-up. McDonald’s everyday value-menu was another major contributor in the quarter.
  
Valuation:
The debt/capital ratio is about 0.46, EBITDA covers interest 20x, and its Cash Flow is above 2x. Analysts believe that McDonald’s could support incremental debt.
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One thought on “Investing Ideas: McDonald’s COMPS Quarter Pounder

  1. Pingback: McDonald's COMPS Quarter Pounder (MCD). Investing Ideas and Stock Market. | CopyWriter Services

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