McDonald's Is Off-Message, but Not All Is Lost

The fast-food giant has drifted from its core, and sales show it. The good thing is, the C-suite admits the problem and is ready to patch things up.

May 1, 2014 at 11:00AM

McDonald's (NYSE:MCD)is trying to find a way back to its core customer. In recent years the fast-food giant doubled down on efforts to revitalize its menu and address quickly shifting consumer preferences. The results have been hit or miss, but mainly miss. As of the most recent earnings report, it seems that management is drifting back toward core products that have changed little over the decades and are still largely responsible for the line at the drive-through. Over the past month, the stock has risen about 4%, even though the company recently missed bottom-line earnings estimates and showed stagnant growth throughout its operations. The mixed signals leave investors wondering where McDonald's is headed.

Bad taste?
A glance at McDonald's first-quarter earnings shows a continued struggle here and abroad. Top-line sales actually climbed 3%, excluding foreign exchange effects, and systemwide same-store sales rose 0.5%. The reason for the latter was a higher average check, as traffic actually dipped.

The company is still trying to regain its footing domestically. U.S. same-store sales were down 1.7% for the quarter (and nearly 3% on a two-year basis). European sales rebounded nicely, though Germany remains a damper on results.

After all was said and done, earnings came in at $1.21 per share -- a 2% decline from the year-ago quarter, excluding foreign exchange effects. The market had expected $1.24 per share.

A zigzagging path
For years now, McDonald's has pushed its premium menu innovations as growth drivers and customer-acquisition items. While that has worked in various pockets (such as the Asia-Pacific region recently), it hasn't been a successful tactic in maintaining McDonald's relevance. Even management admits it. Products like Mighty Wings failed miserably; and from a personal perspective, premium Angus burgers that taste marginally better than standard Golden Arches fare simply aren't worth the near-$10 price tag. It's evident in company figures, as 40% of sales still come from items such as the Big Mac and Egg McMuffin.

In the earnings conference call, management sounded a stronger allegiance to these core items, and to giving even more emphasis to the breakfast menu, instead of mentioning its product innovation.

McDonald's plans an aggressive marketing campaign aimed at reminding customers that this is the place to eat breakfast on the go. To tap into the recently spiked desire for quality out of our everyday food, the company will make sure people know its eggs are cooked on site, along with the bacon and sausage. Despite their appearance, McDonald's sandwiches do not arrive precooked and ready to sling.

With the tides of change moving swiftly, McDonald's is wise to focus on what it has done perfectly for decades. Trying to convince yuppies that its new chicken wrap is just like one found at Panera Bread is a tough battle. Furthermore, it alienates existing customers.

Investors may not need to fret over short-term fluctuations in earnings, as the real appeal of the stock is its chunky and consistent dividend payout. The thing to watch here is strategy and message. McDonald's drifted off point. The good thing is, management knows this and appears to be in the right mind to remedy the situation.

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