It isn’t much of a stretch to suggest that McDonald’s (MCD) has lost its way as a company, let alone a category leader. Last year was a miserable year for McDonald’s … in terms of sales, as well as earnings. Same store sales were up a mere 0.2% in 2013, while profits grew just 2% on a 2% uptick in company-wide sales. And earnings per share of MCD stock fared only a tad better, with a 4% increase in 2013.
Broadly speaking, things didn’t get much better last quarter. The company’s Q1 earnings report posted this morning indicated a 1.7% decline in U.S. same-store sales, and a troubling 4% decline in profits.
For CEO Don Thompson, who only took the helm in July of 2012 and made some pretty significant changes right out of the gate, it’s the kind of start that can leave a board wondering if they’ve got the right guy steering the ship.
Well, while it’s a bit premature to say McDonald’s is out of the woods yet, at the very least (and despite this morning’s news) it’s becoming clear that Thompson now “gets it.” The question is, can he actually do anything about it before it’s too late? The answer is probably yes, but that journey isn’t going to begin where most MCD stock owners are expecting to see it.
McDonald’s is Barking Up the Right Tree
If you’ve been in a domestic McDonald’s lately, there’s a decent chance you’ve seen a remodeled store. There’s an equally good chance you’ve gotten better, or at least faster, service. But if you think the company is focusing on its U.S. stores because that’s where the biggest opportunity for growth is, think again.
As it turns out, Don Thompson and his team see China as the most productive place to foster change … even if only because China is the only place they truly understand how to improve.
For those investors with a moderate knowledge of McDonald’s, it may be a disappointing decision to fix a market that less than 2000 stores currently call home, while the 14,000+ McDonald’s in the United States continue to miss the mark. A more intimate look at McDonald’s operation in China may uncover a good explanation for the foreign focus.
Take, for instance, the fact that the fast-food chain opened 225 restaurants in the United States last year, and aims to add another 250 domestic units this year. Impressed? Don’t be. McDonald’s opened 275 units in China last year, and aims to open 300 new stores this year in China. It hopes to build another 2000 units there by 2017. Translation: There’s more growth opportunity for MCD stock in China.
And to be fair, the company should be working harder in China.