McDonald's (MCD, Financial) stock has been hit badly due to several reasons. One is the company’s poor operating and third quarter results, and the other is its menu, which needs revamping. The company has shown good results for several years and its recent performance should not be the reason to dump the stock.
I believe the stock still has the potential to bounce back and outperform its peers if some of its weak areas are improved. The article will discuss some of the reasons as to why the stock price has declined. The article also discusses the steps the company should take.
Reasons for MCD’s Stock Hit
The company has reported dismal third quarter results. Global comparable stores has declined by 3.3% over the last year in addition to 4% decline in its year over year revenue and 14% decline in operating income.
The dismal results have been partly due to problems related to supplier issues and partly due to bad operating performance in U.S and Europe. Poor performance in U.S and Europe is not because the customers view it as an unaffordable treat. This is evident by the fact that in spite of low menu prices growth as compared to the prices at other fast casual chains like Chipotle (CMG, Financial) and Panera Bread (PNRA, Financial) and slower price increase compared to food inflation, McDonald’s revenue declined.
The main reason of concern for McDonald's is its unhealthy menu categories. If we look at Chipotle, in spite of an increase in its food prices, the company reported 25% jump in its earnings.
This points to the fact that customers are more willing to spend for a healthier diet. The main problem for McDonald's is its inability to understand the local markets requirement and offer healthy choices.
Another major problem the company faced was the supplier issue in China. This has resulted in 23% decline in its comparable stores in China. The company has taken adequate steps to combat this problem which I will discuss in the next segment.
Why I Believe McDonald's will Bounce Back
Since the prime reason for the decline in company’s performance is clear, an analysis on how the company is looking in to these issues will help us better judge if the company is still worth a buy. The company is working on the revamping of its menu and convincing its diners that it offers healthy and fresh food.
To meet the local market demands, the company has invested to provide personalized food option to its customers along with a contemporary eating environment. In addition to the menu, the company is also working aggressively to provide the customers with more choices in their mode of offering with the introduction of kiosks and mobile orders and payment.
An association with Apple will help McDonald's provide its customers greater speed and ease of payment, thus making food and beverage purchase fast and easy for Apple users.
To combat the problems associated with suppliers in China, McDonald's has aggressively worked to restore the menu in all restaurants in China and Japan. The company has been able to shift to new product sources for the 5,000 affected stores in less than 60 days.
I believe this will further help the company to gain customer trust, and with its aggressive reforming steps, will be able to provide customers what they want.
Conclusion
Considering McDonald’s historical dividend growth and a yield of 3.8%, I believe the company is a great stock to hold. Moreover, the company has shown consistent growth over the past several years and has taken aggressive steps to revamp its current operational inefficiency in China and U.S. I believe the stock still has the potential to bounce back and outperform its competitors in two or three years.
