With nothing more than a passing glance at both, they look similar enough to be interchangeable. McDonald's (NYSE:MCD) is the bigger of the two fast-food names, but Wendy's (NASDAQ:WEN) smaller size is arguably its strength. It's more nimble and can position itself as a premium alternative to its bigger rival. Both, however, offer burger fare for eaters in a hurry.
Wendy's and McDonald's are distinctly different outfits, though, particularly for investors. If there's only room for one in your portfolio right now, it's got to be McDonald's. Here's why.
Why not Wendy's?
You know the company. The burger chain's been around for over 50 years, growing from one locale to more than 6,800 stores. Most of them are found in the United States, and most are franchisee-operated. As of the end of September, The Wendy's Company only owned 360 restaurants.
The COVID-19 pandemic, of course, didn't care about the company's corporate structure, exacting a toll on owned and franchised units alike. Wendy's 2020 predicament isn't unique to the chain either. Lockdowns and stifled consumer traffic have been tough on the entire restaurant business.
It's arguable, however, that the coronavirus contagion has dug this particular better-burger organization into a deeper hole than its rivals find themselves in.
One only has to take note of the increasingly contentious bankruptcy filing of one of Wendy's bigger franchisees to get a feel for its deep disruption. NPC International -- which owns nearly 400 Wendy's stores and more than 1,200 Pizza Huts -- filed for Chapter 11 bankruptcy protection in July. Its initial hope was to facilitate a sale to an operator other than Flynn Restaurant Group, including a potential sale of its locales back to The Wendy's Company itself. Flynn is reportedly the top bidder to beat now, raising the prospect that a Wendy's franchisee would also own direct competitors like Arby's and Panera Bread. The latest reports, however, indicate NPC has canceled the auction of its Pizza Hut and Wendy's properties, though no explanation has yet surfaced.
The drama in and of itself isn't damning. But it may be a clue to the struggle other Wendy's franchisees are currently facing, and the subsequent struggle the parent company faces as a result.
In the meantime, Wendy's third-quarter report for the three-month stretch ending in September wasn't disastrous, but not thrilling either. While companywide same-store sales, as well as overall revenue, were up, the fast-food chain's top line fell short of expectations. And, although earnings topped estimates, they were essentially even with the bottom line from the same quarter a year earlier.
Wendy's numbers are in partial contrast to McDonald's results for the same quarter.
Although Mickey-D's reported a 2% drop in revenue for the accounting period ending in September, operating income improved by 5%. Overall income grew to the tune of 10%. Perhaps most important at the time, the company said the month of September was its best single month -- in terms of sales growth -- in almost a decade, indicating the chain is emerging from its pandemic lull with a full head of steam.
Thank music star Travis Scott for the boost. McDonald's built an entire promotion around his celebrity, and it paid off in a big way. In a much bigger sense, though, investors should thank the company's marketing team. They've found their stride again, enlisting singer J Balvin and actor/comedian/former football player Anthony Adams to help hawk food as well.
McDonald's can afford these deals now, as it wisely curtailed marketing spending in the first half of the year when promotions and advertisements would have been ineffective against the pandemic's headwinds. CEO Chris Kempczinski commented in July: "We have amassed a sizable marketing war chest to invest in the back half of 2020."
It's not just more and better marketing firepower that should draw investors to McDonald's as we wind down 2020, though. Were it not for the dust and noise of the pandemic, investors might have started to get a good grip on just how well the company's strategic decision to scale back on company-owned restaurants and increase its franchisee counts is panning out.
For perspective, five years ago, around 6,500 of the world's 36,400 McDonald's restaurants were owned and operated by the parent. Now, fewer than 2,700 of its roughly 39,100 stores are owned by the parent. Last quarter's double-digit percentage increase in net income is a subtle, overlooked indication that the plan is paying off. Though this shift translates into less revenue, it's much higher-margin revenue that ultimately leads to more profits. Where it could take Wendy's until 2022 to surpass its pre-pandemic per-share profits, McDonald's has already done so and is en route to even more profit growth.
None of this is to suggest McDonald's is bulletproof, nor to say Wendy's is doomed. It is to say, however, that McDonald's is able to play offense again at a time when Wendy's is still playing defense. That may be at least partially a function of size.
But the reason for its edge is irrelevant. What matters most right now to investors is that McDonald's has one, and Wendy's doesn't.