McDonald’s Corp. (MCD.N) CEO Steve Easterbrook recently unveiled a turnaround plan. Considering the performance of its stock, this was due, maybe even overdue. McDonald’s has a slew of issues: higher end “custom” burger joints are literally eating their lunch, consumers are more health conscious and MCD’s operating efficiency could be better.
Some of these issues have manifested themselves over the past few years. The latest announcement is just a first step in what might be a long turnaround for McDonald’s; after all, it’s not easy to change course quickly when you have a ship this big.
Source: Eikon/StarMine
Return on assets slipping
The above chart is the quickest way to see the problems facing McDonald’s. The trailing 4Q return on net operating assets measures how effectively management is generating returns from its assets. As you can see in the chart above, from being above 34% in 2012, the measure is now just below 30% (29.9%) in the December quarter. That steady decline is one of the reasons for concern. While mature companies are not expected to grow RNOA rapidly, this kind of decline is one reason the CEO finally had to bite the bullet and make a plan.
Source: Eikon/StarMine
Sluggish margins
Trailing 4Q operating margins are at a five year low of 29%. This is one measure where even a percentage point could make a big difference to earnings and this marker is down by almost two percentage points from the levels of just a couple of years ago. McDonald’s is getting a reputation for lower end cheap fast food. Since it competes with Burger King and other fast food chains, price cuts seem to be one way to attract new customers, which in turn continues to hurt margins. Unfortunately for McDonald’s, the rest of the industry seems to be doing just fine by this measure, with the median margins improving over the last two years.
Consider this: Since November 2013, the company has reported only two positive months (and 15 negative months) of same store sales (SSS) growth in the U.S., with other regions also showing signs of slowing, as tracked by the Restaurant Same Store Sales Index. That means that traffic to the existing stores has been on the decline for almost two years. This announcement was probably overdue, but management seems more focused on structural changes, when the real focus needs to be on the brand and perceived quality of the food served under the golden arches.
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