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How McDonald’s Corp. Grew 25% In 6 Months

By Motley Fool Staff - May 5, 2016 at 2:22PM

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The arches are looking golden once again as all-day breakfast and new value offerings drive growth at the fast-food giant.

This time last year, McDonald's (MCD 2.46%) was, more or less, a stagnating company -- a solid dividend player, without too many growth initiatives to speak of. Since September, however, the stock has grown over 25%, and shows no sign of slowing down.

In this clip from the Industry Focus: Consumer Goods podcast, Sean O'Reilly, Mark Reeth, and Vincent Shen talk about how McDonald's managed to turn itself around, working some life and excitement back into the business, thanks to the changes new CEO Steve Easterbrook has made, from all-day breakfast to an updated value menu and more.

A transcript follows the video.

This podcast was recorded on April 26, 2016. 

Sean O'Reilly: So, a couple days ago, on April 22, I tweeted -- and I'm paraphrasing here, "I feel like I blinked and McDonald's shares went through $100 to $125 without my knowledge." They were hanging out at $100 for like a year, for a long time, back when we were ... and we were like, "I don't know, they're not as cool as Chipotle, they're just hanging out." Then, they introduced all-day breakfast!

Mark Reeth: Revolutionary.

O'Reilly: Is that the reason for the 25% gain? (laughs) 

Reeth: I think that's absolutely part of the conversation. Again, I took a look at the numbers. Shares are up 33% in the last 12 months, which is pretty darn impressive. And to your point earlier, whenever we talked about McDonald's, it was ... it was very much ...

O'Reilly: It was boring, say it.

Reeth: Poo-poo, it's McDonald's. It's old school. We've got Chipotle up here, we've got McDonald's down here. That's been the conversation for a long time. To an certain extent, it's still the conversation. But to their credit, McDonald's has done a lot to turn around their business. And like you said, I think a large part of it has to do with the all-day breakfast. That's one thing that Chipotle doesn't have, a breakfast menu. And I think McDonald's does breakfast better than a lot of its competitors out there. It's also been benefiting from the McPick 2, where you get two menu items for something like $5, which is good value, a good bargain for that customer base that McDonald's is looking for. Yeah, it's been a heck of a turnaround. 

Honestly, and this is just my opinion, I think the turnaround has a lot to do with Steve Easterbrook, the CEO who came in in March of 2015, almost a year ago, when it was still, as you said, down at $100 or so per share. Now it's way up.

O'Reilly: We were just hanging out, talking about it as a dividend stock, and that was it, yeah.

Reeth: It just meandered for a long time there. And then Steve Easterbrook came in. He's been great. He's been at McDonald's since the '90s. He actually left for a short period of time and got some fast-casual dining experience over in England, then came back as the chief brand officer, and eventually became CEO. And, almost as soon as he steps in, things start turning around. They start revolutionizing their menu with the all-day breakfast, with the McPick 2s, they start revamping stores. 

I think most importantly, and people always forget about this, out of McDonald's 36,000 around the world locations, 30,000 of them are owned by franchisees. You have to keep those franchisees happy. When your stock price and sales are just meandering along for years, you're not going to be happy. People aren't going to be lining up to own these stores for you. Now, suddenly, Steve comes in, shares start going up, stores get revitalized, they bring in new menu items, you start seeing sales go up at those franchisees. Now they're happy. Now people are starting to line up again for those McDonald's franchises. So, again, I think a large part of this turnaround has to go to Steve Easterbrook. I think he's been a huge part of this.

O'Reilly: Did either of you hear those rumors that the franchisees were actually fighting the all-day breakfast move?

Reeth: No, tell me more.

O'Reilly: I suspect it was because of supply chain Inventory management, like, "OK, how many Egg McMuffins do we keep on the shelf at 4 p.m.? What are we going to do here?" But, I bet they're happy now. (laughs) 

Vincent Shen: Well, it comes down to the fact that, when you add, basically, a whole day part to the menu, and you have to serve that all day, you only have so much grill space. And when you add those products, it makes it much more complicated. That's absolutely what happened with the franchisees being frustrated. But, once they saw the benefit of the increased foot traffic, and the fact that, the McPick 2 promotion, for example, they hit that on two tiers. They had the one for $2 for the super value-conscious, and they had the one for $5, McPick 2 for $5. And management is talking about how they're seeing that being able to essentially appeal to two groups where, some people go in and split that, so it's still a really great value for them, but it's still in-step essentially with very similar promotions from Wendy's and Burger King, where they're doing these value meals again. And I think that's perfect for McDonald's, because they're returning to their roots, where, in the end, I think most people recognize the fact that, it's not the best food you're getting there.

Reeth: Wait, what?!  Oh my god.

Vincent Shen: But, it comes out of the fact that they want that value, and they want that consistency. Just a quote I saw recently, from Easterbrook, actually, where he talks about simplified menu boards, new crew training procedures. They're looking to every single detail, like font size on the printers, the receipts. And he says things like, "The primary driver of customer satisfaction -- getting it right, hot, fresh food, friendly service." Just hearing management mention these things again in their calls is like, OK, they're refocused on the right things, and this is a really nice trajectory that I think can be long-term for them.

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