Don't be Afraid to Bet on McDonald's Turnaround

After months of reporting declining comps, it seems like McDonald’s (MCD) is starting to show signs of recovery. McDonald’s recently reported great quarterly results and it looks like Steve Easterbrook’s plans are working. Easterbrook’s turnaround initiatives have reaped profits and the stock has moved up in response.

Showing signs of recovery, McDonald’s posted adjusted earnings per share of $1.28 in the latest reported quarter. The EPS comfortably beat the analysts’ estimate of $1.23 EPS.
Revenue for the quarter came in at $6.34 billion compared to the consensus target of $6.22 billion. Global comparable sales escalated 5 percent, versus a 3.2 percent gain projected.

Q4FY15 was the most robust quarter for McDonald’s in last four years as U.S. comps jumped considerably  mainly due to the launch of all day breakfast service. Ever since his arrival, Easterbrook has been proactive in making changes. He introduced some changes like comprising new Pick 2 for $2 offerings to swap the Dollar Menu, the Buttermilk Crispy Chicken sandwich, and also took a pledge to eliminate antibiotics from all the chicken they use as well as ultimately shift to cage free eggs.

In 2012, when Burger King unloaded almost its entire enduring 418 company-owned restaurant, it was able to double its net income within a year. That step lead to $85 million jump in franchise-level operating profit and supported the company to cut $105 million in common and administrative expenses, but the company forfeited $105 million in restaurant-level operating profit.

McDonald’s is anticipating the same situation to occur. As per its previous year’s results and each restaurant averages, the company would mislay $388 million in operating profit by refranchising 4,000 restaurants. However, the difference would be more than reimbursed by the $500 million in common and administrative expenses the company strategies to cut.

At the end, there are certainly various threats to the approach. Most recently, the company’s relationship with its franchisees touched all-time lows, yet that may have altered with prior quarter’s positive results. The refranchising policy will surge the company’s reliance on franchisees and their assistance. The company is also strategizing to take additional debt to purchase back shares which will lead to imbalance in the balance sheet. Conversely, refranchising will certify a steadier cash flow, and if the company can successfully live up to its promise of cutting $500 million in expenditures, McDonald should appear more lucrative.

Conclusion

Given the success of the recent initiatives, I think investors can trust Easterbrook to lead McDonald’s. The company has shown tremendous growth under his leadership, and I expect his future initiatives to reap rewards as well.

 
Published on Feb 9, 2016
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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