McDonald’s Corporation (NYSE:MCD) same store sales rose more than expected in May, showing the fast-food giant deserves a little faith from investors. One month doesn’t make a trend, but don’t count this industry giant out.
Slowing Things Down
A key metric in the food industry is same store sales, or the sales at restaurants that have been open for at least a year. McDonald’s same store sales results have been weak of late in the US. Although the company’s growth is increasingly coming from developing markets, the burger joint’s core mature markets remain important. So any weakness is a concern.
However, McDonald’s Corporation (NYSE:MCD)s management is among the best in the restaurant industry. Part of that is a proactive effort to keep things changing. For example, growth in the last decade was largely fueled by new items. The new fare brought the company into areas like salad and coffee, where it either didn’t compete before or had limited offerings.
More recently, the company has been working to trim items from its menu since too many of the the new products stuck around. At the same time, it has been promoting the value of a McDonald’s Corporation (NYSE:MCD)’s meal. These efforts, among others, led to an impressive 2.4% jump in U.S. same store sales in May. Not surprisingly, the shares jumped on the news.
Market share is the big game in developed markets, and the competition is heating up. For example Chipotle Mexican Grill, Inc. (NYSE:CMG) has led a new wave of restaurants that offer a higher quality of fast food. Burger joints are part of the movement, too. These quick casual restaurants have taken market share from both below, as customers trade up, and above, as casual restaurants like Darden Restaurants, Inc. (NYSE:DRI)‘s Olive Garden and Red Lobster see customers choosing the lower cost fare.
The Old Guys
That’s on top of competition from existing companies like Yum! Brands, Inc. (NYSE:YUM) and Burger King Worldwide Inc (NYSE:BKW). Interestingly, The Wendy’s Company (NASDAQ:WEN) has probably seen the most impact from the higher quality fast food, forcing the company to up its game.
The Wendy’s Company (NASDAQ:WEN) has long positioned itself as offering fresher and higher quality meals than other fast-food burger places. But that claim, and stale restaurants, didn’t hold up after the quick casual trend picked up steam. The barely profitable company is trying to right the ship but is best avoided by all but the most aggressive turnaround investors.
While management is on the right track, too many corporate actions over the last few years have left the company in a weakened state and the brand image isn’t what it used to be. The risks outweigh the potential benefits.
Back to the Giant
This is where McDonald’s Corporation (NYSE:MCD)’s business has shined. The company is boring, does one thing, and does it well. Although sales dipped during the recession, they have since headed higher again. Earnings, meanwhile, only fell once in the last decade (2007) and dividends have been increased on an annual basis each year.