As Black Friday rolls around to start this year's holiday shopping season, most investors are looking for the retailer that is most likely to post the strongest sales. This Fool thinks the best place to look for winners this year is right outside the stores. The winners are most likely to be your neighborhood McDonald's (NYSE:MCD) and Starbucks (NASDAQ:SBUX).
While we know shoppers will flock to the best deals, they still need to eat and grab that cup of coffee on the run. What I really like about McDonald's and Starbucks is that they don't have to run heavy promotions and offer deep discounts to get customers in the door. To me, this makes these two companies the real winners on Black Friday.
McDonald's aims to challenge Starbucks in coffee
In many ways, you can say that McDonald's is jealous of Starbucks. With the launch of the all new McCafes, flavored coffees, and free Wi-Fi, you get the feeling that McDonald's wants to be Starbucks.
In many ways, you can also say that former McDonald's executives really dropped the ball in waiting so long to launch these concepts. After all, McDonald's already had a large base of stores and sat idle, watching Starbucks grow bigger every year without doing anything.
McDonald's now has a Pumpkin Spice Latte on its menu to go up against Starbucks' Pumpkin Spice Latte. Starbucks put the Pumpkin Spice Latte on its menus for the holidays 10 years ago. It has been a holiday favorite ever since, and McDonald's wants to grab its share of the holiday market from Starbucks.
Even though Starbucks started the Pumpkin Spice Latte craze, McDonald's might have a leg up as shoppers come in to grab a quick item off of the value menu and order a Pumpkin Spice Latte to go with it.
One area that needs improvement for McDonald's
The one area that McDonald's really needs to focus on is customer service. Lately, the lines at McDonald's have gotten too long and that's causing unnecessary delays. The good news is that management is aware of this issue. Much of the problem is that the company rolled out too many new menu items that slowed down the service.
McDonald's needs to invest in bigger kitchens with more food-preparation areas. The small spaces have slowed down the pace of keeping all of the menu items readily available. New food-preparation tables would go a long way in speeding up the assembly process and could lead to McDonald's offering custom orders.
Positive outlook for McDonald's
The outlook for McDonald's over the long run looks great. The company expects systemwide sales growth of 3% to 5% and operating income growth of 6% to 7%. I expect the company to continue returning value to shareholders in the form of dividends and share buybacks. This year McDonald's will end up spending $4.5 billion to $5 billion through dividends and share repurchases. The plan next year is to open 1,500 new restaurants and remodel 1,000.
Starbucks still firing on all cylinders
Starbucks continues to defy skeptics with its growth trajectory. Moody's just raised the company's outlook and said that Starbucks' aggressive growth plans should continue to boost the top and bottom lines.
Goldman Sachs is even more positive than Moody's and has put the company on its conviction buy list. Goldman Sachs sees the coffee chain reaching $100 billion in market cap in three years, up from its current market cap of $60 billion today. Over the next five years, the firm forecasts Starbucks to have 30,000 locations, compared to almost 20,000 today.
In the third quarter, global comparable-store sales grew 7% on a 5% increase in customer traffic. Year-to-date, the company has opened 1,700 new stores. The operating margin improved 1.5% to 16.5% year-over-year. Overall, it's tough to find a complaint about the strength in Starbucks' business.
Even Starbucks has a Black Friday deal
Starbucks is offering a special deal this Black Friday on its Stainless Steel Espresso Refill Tumbler. It's on sale for $65 and you can use it to get one espresso drink a day for the month of January. Starbucks says the deal is valued at $140 for the 16 ounce tumbler and the daily drinks.
After Black Friday, the price rises to $75. This holiday season, you not only can get the Pumpkin Spice Latte but also the Gingerbread Latte, Peppermint Mocha Latte, Caramel Brulée Latte, Eggnog Latte, the Cinnamon Dolce Latte, and the White Chocolate Mocha Latte.
This holiday season looks to be strong for both McDonald's and Starbucks. For investors looking for more value, the best bet would be McDonald's with its 3.3% dividend yield and its lower P/E ratio. For investors looking for more growth, Starbucks looks set to continue growing, especially in international markets where the coffee craze is just getting started. Overall, I'm a fan of both companies and see each of them posting strong sales this Black Friday.
Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends McDonald's and Starbucks. The Motley Fool owns shares of McDonald's and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.