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McDonald's Comps Were Golden, but Shares Arched Downward

By Motley Fool Staff - Feb 12, 2018 at 5:27PM

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Now that CEO Steve Easterbrook has turned the company around, it’s being judged by a higher performance standard.

In this segment of the Motley Fool Money podcast, host Chris Hill, Million Dollar Portfolio's Jason Moser and Matt Argersinger, and Hidden Gems Canada's David Kretzmann give their hot takes on McDonald's (MCD 2.46%), which is having no trouble at all getting customers through its doors, with 4.5% same-store sales growth in the U.S. and even better numbers globally. That's just a part of the modernization story, but Mr. Market is hard to satisfy. What's the burger giant doing right, and where's it headed? The guys have some thoughts.

A full transcript follows the video.

This video was recorded on Feb. 2 2018.

Chris Hill: McDonald's put up some impressive same-store sales numbers in the fourth quarter. 4.5% growth in the U.S., and even better globally, Jason. Shares down this week nevertheless. It really does feel like there's been a shift with McDonald's in terms of the expectations, because a few years ago, people would have done handstands and cartwheels if they had put up these kinds of comps.

Jason Moser: We talk about this with restaurants, eventually you become a victim of your own success. I think McDonald's has hit this point. With that said, I think CEO Steve Easterbrook is alright with that. I think the story has really boiled down to taking a worldwide brand, modernizing it and bringing it along with that vision of Easterbrook's as a modern, progressive burger company. So, we've seen investments in delivery and digital and this thing they call the experience of the future. Something's working, because comps are up, traffic is up, operating profits up. The refranchising efforts have paid off here, and now, you have a business where franchises represent 92% of the total store base, vs. 81% just three years ago. That's a lot of overhead they eliminate, while still being able to participate on a profitability side. All in all, this is a business that continues to do very well.

Matt Argersinger: And of course, people who have followed McDonald's for a long time know that McDonald's is kind of a real estate business as much as it is a restaurant. The fascinating thing to me is, even though now more than 90% of their stores are franchises, in most cases, McDonald's still owns those buildings, still collects rent, in addition to the franchise fees for all its franchises. So, the margins for this business are now through the roof.

Moser: Anyone in here been to a McDonald's in the last year?

Hill: Not lately, no.

Moser: It's weird, all of this traffic, and yet, in the room, we're a bunch of no's.

Argersinger: I see Mac behind the glass here pumping his fist.

Hill: Producer Mac Greer, a fan.

Moser: Mr. Costco himself.

David Kretzmann: And you don't even need to go to the restaurants now. They've rolled out delivery to over 10,000 locations, so you can just conveniently have it delivered.

Hill: Quick question, Jason. It seems like, a couple of years ago, the big story inside the restaurants for McDonald's was, they were testing out a higher-end burger concept along with the kiosk ordering, that sort of thing. I don't really hear any talk about that anymore. I'm wondering if Easterbrook has shuttered that project.

Moser: That's not right up their alley. I think what they're trying to do is figure out a way to invest in higher-quality ingredients, eliminate the frozen nature of a lot of that supply chain. But, as we've seen from Chipotle's troubles over the past 20 years, it seems, now -- I guess it hasn't been that long -- it's just really difficult to actually marry the fast food side of things with high quality, locally sourced ingredients.

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