One thing I’ve brought up before on the site is the tendency for people to derive investment theses from stock price performances. The example I’ve referenced before is the case of McDonald’s (NYSE: MCD) stock between around late-2011 and mid-2015; a period in which the share price hovered somewhere between $90 and $100 (i.e. pretty much flat).
What stuck me at the time is how negative the commentary was toward its business. I wonder how much was related to the performance of the business empire versus the fact that the Dow Jones Industrial Average outperformed McDonald’s stock significantly over that time. I don’t just mean from financial media either (you know the old “millennials don’t eat unhealthy food” argument). The company itself was gloomy to the point that former CEO Don Thompson lost his job due the sales growth data.
In any case I downloaded 10-K forms for the past decade to see how noticeable the poor performance actually was. Luckily the company is pretty helpful when it comes to breaking down its sales. Now, by ‘sales’ I’m referring to actual purchases that take place in McDonald’s outlets in the United States – both company owned and franchised. This is different to the company’s annual revenue which is largely made up of rent and other fees from franchisees. I’ll focus on the USA as there are obviously no foreign exchange effects to deal with. (Indeed a quick glance at the US Dollar Index indicates it strengthened massively vis-a-vis the foreign currency basket between 2011 and 2015).
There are a few interesting observations. Firstly, between 2009 and 2013 McDonald’s managed to increase its total sales in every year. It suffered a sales drop in 2014, but went on to grow annual sales in each year after that. The year-on-year drop in 2014 was a little over 1%. Overall, sales growth between 2009 and 2017 has averaged around 2.5% per annum. In other words strip out inflation and everything looks very stable.
The same sentiment applies on a per-restaurant basis. Back in 2009 there were a total of around 13,980 McDonald’s outlets scattered across the United States. Systemwide sales – i.e. the sum of company run outlets and franchised ones – came to a shade over $31 billion. On average each restaurant therefore generated just over $2.2 million per annum in sales. Now let’s fast forward closer to the present day. Last year, the number of McDonald’s outlets was relatively flat on 2009 at around 14,025 nationwide. Total sales clocked in at around $37.6 billion, or around $2.6 million per outlet. Strip out inflation and once again we get a picture that appears very stable.
So why the fuss back in 2014 that cost the CEO his job? As far as I can see the absolute worse figure to bear in mind is 4.1%. That was the same store guest count decline in the United States in 2014. A pretty grim figure for sure but there are a couple of points to bear in mind. Firstly, that rough patch gets offset somewhat by the international business and gains from pricing and per-capita spending. Overall comparable sales for 2014 were only 1% lower than the year before.
Secondly, I like how McDonald’s managed to respond. It tweaks its menu, launches a global advertising campaign via its mega marketing budget, introduces self-ordering kiosks and it’s back to good figures again. The comparable sales figures for the three years following 2014 read as follows in the USA: 0.5%, 1.7% and 3.6%. Guest count growth was also back into positive territory last year at 1% in the USA. Comparable sales in the USA are up 2.7% so far in 2018. As a shareholder I’d wager that the next ten years of 10-Ks won’t show anything materially worse than the last decade’s worth. Time will tell.