Salad Days for McDonald's?
By Amy Tsao
Burger giant McDonald's spent much of the last few years in a deep slump. With 30,000 locations around the world, it had outgrown its main strategy of adding outlets to increase revenue and profits. At the same time, competing restaurant chains' healthier and more appealing menu options were luring away longtime customers.
Last spring, the Oak Brook (Ill.) fast-food chain hit the comeback trail with store renovations, new menu options such as salad entrees, and improved service. Investors bought into the plan. The stock has been climbing since March, 2003, more than doubling to just shy of a two-year high as of July 20, when it closed at around $28.
It sure looks like McDonald's (MCD ) is delivering on its comeback promise. In its June sales update, released on July 14, President and CEO Charlie Bell signaled Wall Street to expect a strong second-quarter earnings report on July 22. Global comparable-store sales (at restaurants open at least 13 months) rose 7.8% year-over-year for the second quarter, McDonald's estimates. Looking at U.S. stores, comparable sales in the quarter were even stronger, up 9.2% year-over-year.
Yet analysts are already worried that McDonald's needs a longer-term game plan if revenue and earnings are to see continuing improvement. "At the end of the day, a majority of customers are still buying off the menu board of burgers and fries," says Herb Achey, a consumer analyst at US Trust.
Salads and other healthier menu items have helped McDonald's win back some customers, but Achey questions whether it might be a case of too little too late, as McDonald's faces increasing competition and an ongoing backlash over food that critics charge is contributing to obesity. And Achey questions how the company will attract new diners. "That's where we get tripped up," he says. (McDonald's stock is a holding within US Trust accounts.)
McDonald's can't comment ahead of its earnings report, but investors can expect to hear about innovations in service and food on July 22, when CEO Charlie Bell and other top execs brief analysts and investors about second-quarter numbers. However, management likely won't address how and when the initiatives will affect Mickey D in the long term, says Eric Jemetz, senior equity analyst at New York City-based asset-management company Rockefeller & Co.
"They need to characterize with numbers where the company will be 10 years from now," says Jemetz, who wants to hear more discussion about what kind of growth McDonald's has outside of the U.S. Sales in non-U.S. markets made up half of 2003'se $46 billion revenues and about 44% of operating income. (Neither Jemetz or his firm owns the stock.)
SAME OLD STORY?
Given how far the shares have risen over the past 18 months, Achey recommends that investors wait for "clarity on future growth." And even if McDonald's lays out a plan, the stock could actually pull back in the near term because comparable sales, a widely followed measure of productivity at existing stores, could become a difficult number to beat over the rest of the year.
This June's rise in comparable sales of 5.6% laps a relatively low 2.1% gain in 2003. "We're coming off some of the easiest comparisons," Achey notes. Things become tougher starting this month, as last July's comparable sales were 9.9%. Averaged together, U.S. comparable sales in the second half of 2003 rose by 11%, and global comparable sales in those months rose by 5.6%. "When they first start having tough comparisons," says Achey, "people will go back to the same old things that have been structurally impeding McDonald's."
McDonald's plan to regain momentum has been moving along nicely. But the stock may be due for a pause until the world's biggest burger vendor delivers Phase II of its comeback strategy.
Tsao is a reporter for BusinessWeek Online in New York
Edited by Beth Belton