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Can The McD App Boost Sales at McDonald's?

In an effort to boost sales, McDonald's (NYSE: MCD  ) is looking to go digital. The world's largest hamburger chain just announced that it will be testing a new McD app in more than 1,000 stores. The hope is to get younger shoppers more engaged with the McDonald's brand. While customers won't be able to make purchases or order with the app, they can get daily deals sent directly to their smartphones. With mobile apps having found success at Starbucks (NASDAQ: SBUX  ) , McDonald's wants in on the action as well.

McDonald's continues to underperform in the U.S.
McDonald's is desperate to revive same-store sales at its restaurants. For the month of November, U.S. comparable sales decreased 0.8%. On a global basis sales rose 0.5%, led by a 1.9% increase in Europe. The strongest aspects of McDonald's business in November were breakfast, chicken menu items, and the Dollar Menu.

McDonald's has ambitious plans going forward with its "Plan to Win" strategy. With all the competition in the restaurant space, McDonald's is not only playing defense to protect its No. 1 position, it is also trying to find new ways to grow. The emphasis for McDonald's is on optimizing its menu, improving customer service, and continuing to grow the brand.

Going forward, McDonald's targets system-wide sales growth of between 3% and 5%, and operating income is expected to grow 6% to 7%. Next year, McDonald's plans to open 1,500 to 1,600 new restaurants and remodel 1,000 others. The company also expects to benefit from its sponsorship of the Winter Olympics in Sochi.

Cash returned to shareholders is a huge positive
One great thing about investing in McDonald's is that the company generates a tremendous amount of cash. Over the last few years, the company has generated cash from operations of around $7 billion annually. McDonald's has been rewarding shareholders in the form of dividends and share repurchases. This year, the company will return $4.5 billion to $5 billion to its shareholders. Its dividend yield of 3.4% is one of the best in the restaurant industry.

What's with this new McD app?
McDonald's is targeting younger customers with its new McD app. The app will let customers know of deals in their particular area, such as a buy-one-get-one free breakfast sandwich or a $1 McChicken sandwich. In essence, the new app so far is just an electronic coupon. Down the road, McDonald's hopes to change that by allowing ordering and payment.

Mimic Starbucks' success
So far, Starbucks has been the most successful restaurant company with its mobile app. The company introduced its app in 2011; today, about 10% of all purchases are made using the Starbucks app on iOS and Android. Starbucks allows its customers to make purchases and earn rewards via the My Starbucks Reward program. This certainly helps keep Starbucks engaged with its customers and builds customer loyalty.

By following Starbucks with its own mobile app, McDonald's continues to mimic the success of Starbucks. McDonald's emphasis on coffee and the rollout of its McCafes is a direct response to the success that Starbucks has had. In my article "Why McDonald's and Starbucks Are the Real Winners This Black Friday," I talked about how McDonald's has copied many of the things that have made Starbucks successful. This includes McDonald's even offering a Pumpkin Spice Latte this past holiday season.

How do shares compare?
I see Starbucks as more of a growth stock and McDonald's as a value stock. McDonald's is trading at only 15 times next year's earnings, while Starbucks is trading at 24 times next year's earnings. Starbucks' dividend yield is only 1.3%, while McDonald's yield is 3.4%. Over the next five years, Starbucks plans to grow to 30,000 locations worldwide, up from 20,000 today. It's this growth that warrants Starbucks trading at a higher multiple than McDonald's, not to mention global comparable sales increasing by 7% in the third quarter.

Foolish assessment
McDonald's will continue to tinker with its business until comparable sales turn around. I see things improving for McDonald's as we head into 2014. Starbucks, meanwhile, will continue doing what it does best: serving great coffee and opening new locations. It's been a winning formula this year for investors, with shares of Starbucks up over 39%. Over the long-run, I'm a big fan of both Starbucks and McDonald's.

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Related Tickers

9/26/2016 4:01 PM
MCD $116.53 Down -0.64 -0.55%
McDonald's CAPS Rating: ***
SBUX $54.04 Down -0.39 -0.72%
Starbucks CAPS Rating: ****