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posted on 22 July 2017

Mickey D's Gets An 'A' For Turnaround

by Investing Daily, Investing Daily

- this post authored by Scott Chan

Investing Daily Article of the Week

A couple of weeks ago, we looked at Buffalo Wild Wings (Nasdaq: BWLD) and cautioned that there was no rush to jump into the stock. The share price has since dipped another 6 percent, closing trading on Friday at about $120 a share. Clearly, investors need to see more to buy a turnaround story there.

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This week we take a look at a restaurant chain that did manage to engineer an impressive turnaround. As you can see in the chart below, McDonald's (NYSE: MCD) essentially treaded water until taking off in mid-July 2015.

When taking into account the fact that the S&P 500 - proxy for the broader market - returned some 34 percent in 2013 and another 15 percent in 2014, MCD's relative performance during that period was pretty lousy. Year to date, however, MCD has returned (including dividends) almost 30 percent in 2017. In a relatively short amount of time, the stock has gone from a laggard to a leader.

Flash back to 2013, McDonald's was in the midst of a slump. From the second quarter of 2012 through the first quarter of 2015, a span of twelve quarters, the company missed revenue and earnings estimates each nine times. It did not missed expectations by very much - the largest revenue or EPS miss during that period was less than 7.5 percent - but the consistently underwhelming financial results sapped investor enthusiasm. Between 2012 and 2014, earnings per share fell from $5.37 to 4.82 and the restaurant chain was losing market share to competing fast-food chains. And relationship between the corporate office and franchisees was very poor.

Fast forward to 2015. In March that year, Steve Easterbrook, former chief brand officer and former head in the U.K. and northern Europe divisions, took on the mantle of CEO and launched sweeping changes across the organization culturally and strategically.

He stripped away layers of bureaucracy to simplify the corporate structure and to increase accountability. He mandated that the company listen more to its customers to get in tune with changing customer tastes and to endeavor to offer higher-quality service and better food. For example, one of the earliest actions under Easterbrook was to commit to only serving chickens raised without the use of antibiotics to better meet customer demand for antibiotic-free food.

One major turnaround driver was the implementation of "All Day Breakfast," which made its popular Breakfast Menu available to customers during all open hours and immediately boosted sales, which by the second half of 2015 had already breathed new life into the stock. The introduction of the McDonald's app enabled customers to order remotely and pick up their food at a location of their choice.

Moreover, the company has tested and rolled out self-order kiosks and table service that aimed to improve efficiency and customer service. Expansion of its menu also gave customers more choices and more reason to return. For example, the introduction of the "Grand Mac" and the "Mac Jr.," different size versions of its famous "Big Mac" burger, have been successes. The restaurant chain has revamped the décor at many locations to improve the look and feel of the McDonald's experience and even introduced delivery services in select areas.

Put everything together and same-store sales are growing again, including at a 4 percent clip globally in the latest-reported quarter. Top and bottom lines in recent quarters are consistently beating The Street's expectations and the stock performance has made shareholders very happy.

Some franchisees voiced their displeasure and skepticism at Easterbrook's reform plan in the beginning, but improving sales quickly won them over. By the end of 2018, McDonald's projects that by the end of this year, about 93 percent of its locations will be operated by franchisees, up from approximately 80 percent when Easterbrook took the helm. Franchisee-operated restaurants offer the corporate parent higher profit margins and local operators tend to have better knowledge of local tastes.

So for Buffalo Wild Wings, as McDonald's shows, a turnaround is always possible. But there's still a lot of work to be done. Mick McGuire's plan to refranchise more locations is only one piece of the puzzle. In the months ahead, the company will have to make some major moves to get investors excited again.

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