McDonalds Corp. (MCD), the low-cost burger joint of choice, has been one of the few companies in the world to show virtually total immunity from the bear market and credit crisis. It is trading not far from its all-time highs now after reporting strong November sales this week. Global same-store sales were up 7.7% while U.S. locations posted a still respectable 4.5% result.
Two Reasons Why McDonalds is so Resilient
With more than 31,000 restaurants in 100 countries, the iconic purveyor of Big Macs and Happy Meals generated more than $22 billion in revenue last year to blow away its competition.
One: Consumers are trading down from more expensive restaurants.
Two: Small price increases on the popular Dollar Menu don’t seem to be negatively affecting sales.
Many feared that commodity-driven price increases on items like the double cheeseburger would temper the firm’s value proposition. But with increases occurring industry-wide, it’s the price differential and not the actual price level that matters.
Strengthening U.S. Dollar a Concern
Can the good times last? One concern is that due to McDonald’s global footprint — more than 50% of its operating income is generated overseas — it has been adversely affected by weakening foreign currencies and a strengthening dollar. Total sales growth would have clocked in at 9.6% if it weren’t for these fluctuations. While this is an unfortunate consequence of a globally diversified revenue base, on net this is still a positive due to the revenue stability a global operation provides.
While MCD is one of the strongest icons in American culture, the company itself is certainly becoming more cosmopolitan: Nearly two-thirds of the company’s income is now generated outside of the United States. And there is room for more.
Room for Growth
You don’t have to drive far down any of our nation’s interstates to see how saturated the quick-service restaurant business is. MCD operates 47 restaurants per million people in the United States, compared to less than one restaurant for every million in China. Even in Europe, it operates just nine locations per million people.
This creates a huge expansion opportunities for the company. According to studies by the Chinese government, the ranks of the middle class there has reached roughly 250 million — equivalent to the population of the United States in 1990. Thanks to urbanization and the prevalence of dual-income households, it is becoming more socially acceptable to frequent western-style restaurants.
The Growth Story — What’s in Store for 2009?
Not only is there opportunity for more locations in China, given the country’s economic growth, but same-store sales look ready to grow as well thanks to breakfast sales. A recent NPD Group study found that approximately 50% of all foodservice volume in China occurs before 9 am. But for MCD, only 6% of its Chinese sales are tied to breakfast. It’s not that western-style breakfasts aren’t popular in Asia; in fact, McGriddle sandwiches are a runaway success in Japan. It’s just that breakfast was only recently introduced to China. Early feedback on marketing initiatives has been very positive, so I expect great things here.
Back home, MCD is the most dominant player in the hamburger-focused quick-service biz. Second and third place competitors Burger King and Wendy’s trail significantly, with market shares in the low teens compared to roughly 47% for MCD. This share has been growing over the last 10 years as menu innovation efforts, extended hours and remodeling initiatives have attracted new customer traffic at a time of turmoil for competitors.
The most notable menu change for the company is known internally as the Combined Beverage Initiative, or CBI. This includes not only the rollout of premium brewed coffee and the McCafe specialty coffee concept, but also bottled water, sweet tea, energy drinks, and others. Overall, the company believes it can drive an incremental $60 billion in sales that could grow 4% per year.
Beverages sales now make up 25% of total revenue, but carry much better margins compared to food items, especially with the government forecasting healthy rates of inflation for beef and chicken heading into 2009. Ultimately, it is hoped that the CBI could drive a higher beverage mix for the company, adding to its prodigious cash flow and healthy balance sheet.
It’s no surprise then that management plans to return $4billion to $6 billion to shareholders over the next year through share repurchases and dividend hikes. Citigroup (C) analyst Gregory Badishkanian believes the company is currently underleveraged, and is looking for debt issuances to pay for some of these shareholder payouts. The rest will be largely out of free cash flow, which is expected to total some $7.5 billion through 2010.
These actions should provide support for shares, which along with Wal-Mart Stores Inc. (WMT), are the only two Dow 30 constituents to be up for the year. MCD is still a buy on the recent pullback, if you’re in the mood.
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This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
