This week's restaurant industry headlines revealed four hot topics for fast-food chains Burger King Worldwide (NYSE:BKW.DL), McDonald's (NYSE:MCD), and Yum! Brands (NYSE:YUM). The fast-food industry faces stiff competition from the fast-casual dining industry. As a result, these companies are moving to improve the customer service experience via innovative ordering systems and new products. Also, McDonald's wants to find other ways to enhance shareholder value.
Satisfries for Kids' Meals
In response to the healthy lifestyles movement, Burger King made its low-calorie Satisfries french fries a standard part of its kids' meal. Burger King marketing executives acknowledged the challenge that parents face in providing their children with healthy food while trying to meet their finicky tastes. Burger King claims it's the only fast food restaurant to serve reduced-calorie french fries. Burger King's press release goes on to talk about how its Satisfries possess "40% less fat" and "30% fewer calories" than McDonald's french fries.
Troubles at McDonald's
Recently, McDonald's released its February same-store sales figures. One of the most troubling statements in the press release goes as follows: "In February, U.S. comparable sales decreased 1.4% amid challenging industry dynamics and severe winter weather." Call your attention to the words "challenging industry dynamics." This means McDonald's faces headwinds that could result in a downturn in fundamentals in the U.S. market. Weather represents a temporary thing. Business challenges in the form of changing customer tastes and preferences could mean something more permanent.
Europe saw comparable sales increase 0.6% due to encouraging results in France and the U.K. "Ongoing weakness in Germany" served as a drag on European results. Weaknesses in another developed market, Japan, contributed to the same-store decline of 2.6% in the Asia-Pacific, Middle East, and Africa segment.
McDonald's CFO Peter Bensen practically acknowledged a dim future for McDonald's when he announced an "investigation into increasing leverage in the capital structure" for the purpose of "increased return of capital to shareholders" reports Barron's and Bloomberg. Bloomberg conveyed that McDonald's might return more cash to shareholders if it increased its debt. There are two problems with this. First of all, it's really not returning cash when you put the shareholder further in debt to make the increased dividend payment. Second, McDonald's long-term debt-to-equity ratio already stands at 88%. It pays out 73% of its free cash flow in dividends with a 3.4% dividend yield. Also, the company wants to cut costs and sell company stores to franchisees in places like Taiwan, China, and South Korea, resulting in higher margins but lower revenue. This really sends a signal to the investment community that McDonald's has expanded as far as it can and the only way it can boost shareholder returns is by raising the dividend and financial engineering tactics such as refranchising. A growing company would use any extra cash flow to expand.
Table computer, not tablet
Yum! Brands' Pizza Hut wants to introduce an exciting new way to order your pizza: an interactive table, according to Nation's Restaurant News. Customers will come into a Pizza Hut, sit down at a computerized table, and through a visual interface, customize a pizza to their liking. This will certainly set Pizza Hut apart as a technological innovator. It will also add an entertainment element to the Pizza Hut experience, as customers will be able to play games on it as well. Unfortunately this table computer still resides in the test phase for the moment, with no plans for a national rollout yet.
Things to look for
Burger King's Satisfries addition to its Kids Meal represents a small proverbial feather in its public relations cap. However, Burger King and its franchisees operate 13,000 stores globally; significantly fewer than the 35,000 McDonald's restaurants, meaning it has more room for expansion. Look for huge dividend increases from McDonald's to the detriment of its balance sheet. However, don't expect much in the way of capital appreciation over the long term for McDonald's shareholders.
For Yum! Brands, Pizza Hut's table computer serves as a desperately needed customer draw for a company that suffers from public relations mishaps such as the avian flu scare in China and the sanitation incident in West Virginia.
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