In this MarketFoolery video segment, host Chris Hill and Supernova and Rule Breakers' David Kretzmann dissect the ridiculously good comps in last week's quarterly report for the world's second-largest fast-food chain. Nobody was expecting anything like this, especially amid the "restaurant recession." So how did they do it? And what's coming next from new CEO Steve Easterbrook?
A full transcript follows the video.
This video was recorded on July 25, 2017.
Chris Hill: We're going to start with McDonald's (MCD 0.83%), which is hitting a new all-time high on their second-quarter results. Any time you're looking at restaurants, same-store sales is, if not the most important metric, it's certainly in the top three or so. Global same-store sales for McDonald's up 6.5%. That's insane!
David Kretzmann: Not what many people would have expected.
Hill: This is McDonald's!
Kretzmann: They're supposed to be dead in the water, right?
Hill: Well, not necessarily dead in the water, but in the same way that people look at the return on bonds and that kind of thing, it's 1% or 2% -- that's sort of how I've thought about McDonald's global comps for so long. Yeah, they'll be up 1%-2%, that sort of thing. Any restaurant would love to have this.
Kretzmann: Yeah, we are in the so-called "restaurant recession" right now. We've had a couple years of declining restaurant traffic, at least here in the U.S. McDonald's has done a lot to revamp those sales. Obviously, they came out with all-day breakfast back in fall of 2015. That attracted some people back into the stores. They're doing some more to revamp their core menu. They're transitioning from frozen beef to fresh beef in some of their sandwiches. So, doing a lot of different things. Then, on the operational front, they're also transitioning more and more to the franchise model. Right now, about 80% or so of their total restaurants are franchised, and they're looking to get that to 90% by the end of 2018. They're not only just doing that transition to franchising overall, but they're also trying to get the weaker franchises to sell to the stronger franchise operators. Say, let's consolidate to our best operators. And so far, that seems to be going really well for them, refocusing on what matters.
Man, it's paying off. This is a company that's still producing free cash flow of over $4 billion. The dividend has been rising steadily since the Great Recession, so it's over a 2% yield. On top of that, the stock has doubled in the past six years or so, so shareholders who have been patient and stuck with the company, even though there were a few slow years there since the recession, those patient shareholders are being rewarded today.
Hill: We talked recently on Motley Fool Money about Microsoft and the performance of that stock since Satya Nadella became CEO. Steve Easterbrook became CEO of McDonald's in the spring of 2015. Since then, just a little over two years, the stock is up 60%. And that was absolutely a situation where you could say he had a little bit of an easy act to follow with Don Thompson not doing a great job. Not only did he not do a great job and the stock didn't do well, but you also heard a lot of grumbling from the franchisees, and it really seems like Easterbrook, right out of the gate, made a lot of overtures to the franchisees, wanted to understand what their pain points were, how he could help, all that sort of thing. I don't think anyone expected this. Even the most optimistic bull when it came to all-day breakfast, I don't think they were expecting this.
Kretzmann: Sixty percent in a couple of years, for a company that's already the size of McDonald's, you're not expecting this level same-store sales growth. So yeah, I would say Easterbrook gets an A+ so far. And those results are even more impressive when you consider how restaurants across the board are struggling right now. If restaurants were in a great time altogether, then these results are good but maybe not great. But these results are phenomenal, considering the restaurant environment.
Hill: Delivery -- do you have any insight into where they are with delivery? I think they're partnering with Uber Eats. The sense I get is, they're in the earliest stages of delivery. When you think about Panera and what Panera has done, not just with the 2.0 concept in some of their locations, but also delivery, the idea that McDonald's could put up even better numbers if they get delivery right, I don't know. I'm dumbfounded, clearly.
Kretzmann: Yeah, that could be another growth driver. They didn't mention anything in the press release for this quarter. I haven't had a chance to look at the conference call yet. But something that they are rolling out with their franchisees, they've reached an agreement with the majority of their franchisees that McDonald's the company will put up 55% of the cost of certain restaurant upgrades if the franchisees agree to fund an advertising campaign for a national value menu. As I said, the majority of the franchisees approved that arrangement with the company. Those innovations include new dessert counters and self-order kiosks. So they're looking for different ways to improve that ordering process. Those in-store kiosks, you're seeing more restaurants do that, including Panera. Delivery might be something we keep hearing about more in the next few years, who knows?
