MCD Stock – McDonald’s CEO Needs to Take the Wheel

by Jonathan Berr | January 24, 2014 9:30 am

When Don Thompson succeeded Jim Skinner as CEO of McDonald’s (MCD)[1] in 2012, he faced the unenviable task for succeeding one of the most popular and well-liked corporate leaders on Wall Street. Now, as MCD stock posts another subpar quarter, the road ahead for Thompson is getting harder and harder.

MCD-stock-mcdonalds-ceo[2]During the most recent quarter,  McDonald’s earned $1.4 billion, or $1.40 a share, which was about what it earned during the same time last year and a penny better than Wall Street estimates. But the problem for MCD stock continues to be revenue, which grew 2 percent to $7.09 billion in the quarter, under the $7.11 billion analysts expected.

Even more depressing was the 1.4 percent drop in sales at existing stores. According to Bloomberg News, analysts had only predicted a 0.2% decline.

During the company’s earnings conference call, McDonald’s CEO didn’t offer investors much reason to expect a better performance in 2014, noting that global comparable sales are expected to be relatively flat.

And management’s lack of enthusiasm is hurting the stock price. MCD stock has gained just 3.3 percent over the past year, underperforming Wendy’s (WEN[3]), which gained 68 percent and Burger King (BKW[4]), which has gained 30 percent.

Under the new McDonald’s CEO, everything that could go wrong has gone wrong for MCD stock. Remember the overpriced Angus burgers? If not, don’t feel bad — customers largely ignored the item, which was cut from the menu last year. Mighty Wings, which the company touted as the best thing to ever happen to chicken, were a gigantic bust … as were the new versions of the Quarter Pounder and the McWrap.

In fact, it’s hard to remember the last time McDonald’s had a hit. The McCafe line of coffee beverages took off in 2009, but what about food? The much-hyped cult McRib made its debut as a limited time menu option in 1981 — 33 years ago. For a company that regularly touts its ability to “innovate”, that’s a pretty dismal track record.

Another thing weighing down MCD stock is service.

Not only does the chain have the slowest drive-throughs[5] in the industry but according to QSR magazine, they recently hit a 15-year low. The chain scores poorly on other metrics such as customer friendliness.

As for taste, Wendy’s beats both MCD and Burger King. The problem isn’t entirely the fault of the burger flippers, though. Managers like McDonald’s CEO have created a gigantic menu full of items that customers don’t want, which has gummed up service.

Earlier this week, I got a first-hand look at MCD’s lousy service. Feeling adventurous, I decided to try the Bacon Cheddar McChicken sandwich[6]. The cashier who took my order told me that the restaurant didn’t sell such a thing. Too bad there was an advertisement for the sandwich on a wall just a foot away from us.   

As if that weren’t enough, McDonald’s is starting to put the squeeze on franchisees, who operate 90 percent of its nearly 14,000 U.S. locations. Bloomberg News[7] reported last year that many operators were furious over the rising fees that McDonald’s was charging for rent, remodeling and employee training among other things that were well above what their counterparts at other chains were paying. Another pet peeve of the franchisees is McDonald’s relentless promotion of low-margin dollar menu items.

Sensing the growing unease of such an important group, MCD recently named Deborah Wahl as chief marketing officer, who interestingly has no fast food experience. “… executives familiar with the business said that hiring an outsider may demonstrate to franchisees that the chain is looking to make real changes,” according to Advertising Age.[8]

Easier said than done.

Though its tempting to argue that the cheap P/E multiple of 17 makes MCD stock a bargain compared with Burger King’s 39 and Wendy’s 77, or that its 3.4% dividend yield is mighty tasty, I don’t think MCD stock is worth buying. McDonald’s is headed nowhere unless Thompson has some bold, innovative ideas that no one has heard about yet. And given what we’ve seen so far, that seems highly unlikely.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

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  5. drive-throughs:
  6. Bacon Cheddar McChicken sandwich:
  7. Bloomberg News:
  8. Advertising Age.:

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