MCD Stock: The Simple Reason to Be Bullish on McDonald’s Corporation
McDonald’s Corporation (NYSE:MCD) stock is up about 32% since last September as investors have begun to cheer the burger chain’s growth revival plans. If you recall, McDonald’s was facing sluggish or even declining sales in the last few years as the company battled the perception that its food is unhealthy and over-processed. MCD stock mostly traded range-bound in that time as the company was also criticized for losing touch with its customers.
But in May of last year, newly appointed CEO Steve Easterbrook unveiled a turnaround plan to revive the business. Easterbrook vowed that the company would strip away layers of bloated management, focus more on listening to customers, and try to better anticipate consumers’ changing tastes.
Since then, the company cut several menu items in an attempt to speed up customer service, introduced a new higher-quality burger (“Sirloin Third Pounder”), announced that it would be removing antibiotics and other additives from its chicken in the U.S., and introduced an all-day breakfast menu.
The strategic moves are starting to pay off and it looks like the burger chain is starting to stage a comeback. In the quarter ended December 31, the company’s same-store sales in the U.S. rose 5.7%, which is the best quarterly growth for McDonald’s in about four years. (Source: “McDonald’s Wants to Open More Than 1,000 New Restaurants in China,” Fortune, March 31, 2016.) Global same-store sales increased five percent over the previous year.
So what is the next initiative in the turnaround plan for McDonald’s?
McDonald’s has its eyes set on Asia. The burger chain announced last week that it wants to open more than 1,500 new restaurants in China, Hong Kong, and South Korea over the next five years. (Source: Ibid.) The additional restaurants would add to the 2,800 restaurants already in the region, the majority of which are company-owned.
The focus of the plan, though, is China, which the company hopes will help drive its future growth initiatives. McDonald’s wants to open more than 1,000 restaurants in China, on top of the current 2,200.
McDonald’s also hopes to make China the company’s second largest market. China is currently the company’s third largest market, behind the U.S. and Japan.
Easterbrook told The Wall Street Journal that McDonald’s is betting on continued population growth and increasing urbanization rates to drive sales even as the economy slows. (Source: “McDonald’s Plans to Add More Than 1,000 Restaurants in China,” The Wall Street Journal, April 4, 2016.)
“This will allow McDonald’s to accelerate our growth and scale faster across diverse markets placing us closer to our customers and the communities we serve,” Easterbrook said in a separate statement. “We’re in the midst of transforming our business and taking a strategic and thoughtful approach to enhance our ability to grow around the world.” (Source: “McDonald’s eyes greater restaurant expansion in Asia,” CNBC, March 31, 2016.)
Easterbrook also said that the company wants to expand into the region by way of franchising, which is a cheaper way to operate restaurants. Franchising is also part of Easterbrook’s turnaround plan, as the company has a goal of selling 3,500 company-owned locations to franchisees by 2018. That would increase the share of franchised restaurants from 81% to 90% globally. (Source: Fortune, op cit.)
The expansion of McDonald’s into Asia comes after a food safety scare at a key supplier in 2014 left some of its restaurants without beef or chicken, which caused sales to nosedive. But sales have recovered since then and in the most recent quarter, same-store sales in China rose four percent. That’s the second straight quarter of growth in the country.
The Bottom Line on MCD Stock
If the expansion of McDonald’s into Asia goes according to plan, the revenue generated from the region should provide a boost to overall revenues. The next few years have the potential to be big for the company, particularly in China, and that could mean big things for MCD stock.