The sudden departure of McDonald's CEO Steve Easterbrook is a surprise, but we ultimately believe newly appointed CEO Chris Kempczinski is the best positioned executive to lead McDonald's in future. Easterbrook, who left McDonald's "following the board's determination that he violated company policy and demonstrated poor judgment involving a recent consensual relationship with an employee," had been instrumental in the company's turnaround efforts since 2015. This includes a successful global segment reorganization, refranchising more than 4,000 locations, and eliminating $500 million in annual SG&A expenses. During that period, McDonald's also undertook several "velocity growth accelerators," including (1) an experience of the future layout, which features a combination of ordering flexibility, customer experience, and a more streamlined menu; (2) mobile ordering and payments; and (3) delivery alternatives.
When Easterbrook was appointed CEO in January 2015, he was also tasked with adding outside perspectives that would help to develop new growth strategies that capitalized on McDonald's key strengths: its brand, its franchisees, and its scale (also the key components behind our wide-moat rating). Kempczinski was one of the key hires during this time, joining McDonald's in September 2015 as executive vice-president of strategy, business development & innovation following leadership positions at Kraft and Pepsi. Kempczinski had been actively involved with the velocity initiatives--including digital and delivery--and worked with franchisees to adopt these platforms since becoming the head of McDonald's United States in January 2017. We also believe Kempczinski's focus on menu innovation, restaurant operations, and international expertise (from his time at Kraft) make him a strong CEO candidate.
There is no change to our $215 fair value estimate, wide-moat rating, or Standard stewardship rating following the CEO transition, and see shares as modestly undervalued.
McDonald's CEO Steve Easterbrook set in motion a major turnaround in 2015, including reorganizing the company into segments based on the maturity and competitive position of its different markets, refranchising more than 4,000 locations (and targeting longer-term franchisee system ownership of 95%), and eliminating $500 million in net annual selling, general, and administrative expenses. The company is also emphasizing a number of "velocity growth accelerators," including (1) an Experience of the Future layout, which features a combination of ordering flexibility (including counter, kiosk, web, and mobile ordering), customer experience (including a blend of front counter, table service, and curbside delivery), and a more streamlined menu that still allows for personalization; (2) mobile ordering and payments; and (3) delivery alternatives. We believe these initiatives, coupled with efforts to redefine the drive-thru experience through the acquisitions of Dynamic Yield (predictive ordering) and Apprente (voice), have already started to make McDonald's a more agile organization more aligned with evolving consumer restaurant preferences.
We're particularly encouraged that recent global comparable sales improvement hasn't been a function of a single factor but rather a combination of recipe changes using higher-quality ingredients, incremental labor investments and training (improving speed of service and order accuracy), and new technologies. Additionally, the rollout of its velocity growth drivers implies McDonald's is overcoming previous supply chain and execution issues, and it suggests a more seamless rollout for new products and technologies. While the company must still contend with aggressive industry promotional activity, a wide food at home/food away from home price gap (limiting near-term pricing opportunities), and wage increases across many global markets, we're confident that it can sustain normalized mid-single-digit system sales growth and mid- to high-single-digit operating income growth--suggesting operating margins improving to the high 40s over the next five years--through refranchising and its customer experience/digital/delivery initiatives.
Nonexistent switching costs, intense industry competition, and low barriers to entry make it challenging for restaurant operators to develop an economic moat. Although McDonald's has faced increased competition, a tepid macro environment, and evolving consumer views about menu composition and in-restaurant experience, we believe it possesses a wide economic moat. Our moat rating is based on a mix of structural and intangible competitive advantages, including a widely recognized brand, a franchisee system aligned on driving unit-level productivity improvements, and meaningful economies of scale. These qualities were instrumental in helping McDonald's to build the largest restaurant chain in the world (based on systemwide sales) and resulted in leading market share in most countries in which it operates, with the notable exception of China. McDonald's generated $96 billion in sales at its company-owned and franchised restaurants during 2018, representing almost 4% of the estimated $2.5 trillion global restaurant industry. This almost doubles Yum Brands' systemwide sales of $49 billion in 2018 (including Yum China) and dwarfs Restaurant Brands International ($32 billion) and Subway ($12 billion).
With strong brand awareness, consistent customer experience, convenient restaurant locations, and a uniform value-priced menu balancing core menu items with locally relevant options, McDonald's is among the few restaurant chains to enjoy success globally. McDonald's average trailing 12-month sales of around $2.5 million per restaurant trumps the quick-service restaurant industry average of just over $1 million per location. Additionally, we believe exterior and interior restaurant decor upgrades, more-efficient kitchen and drive-through configurations, and an Innovation Center (a 38,000-square-foot facility where the company can simulate new restaurant prototypes across a wide range of configurations, technologies, dayparts, and guest count volume) can assist with management's velocity growth plans and drive restaurant productivity metrics higher over an extended horizon.
Menu innovation has historically played an important role in enhancing McDonald's intangible asset moat source. Management has cited executional and complexity issues with its menu over the past several years, so we're encouraged by ongoing menu rationalization efforts and a more streamlined value menu offering. We view these decisions as prudent, but also acknowledge that the composition of McDonald's menu will require a careful balance between rationalization and incorporating local preferences, something that could take additional time and resources (capital, labor, data analytics) to fine-tune. To that end, we find management's three-prong approach to rebuilding guest traffic commendable. This includes: (1) a focus on family-oriented products/experiences and the breakfast daypart to retain current customers; (2) convenience/value improvements to regain lapsed customers (including a streamlined version of the McPick value menu, $1 beverage menu, a $1-$2-$3 national value, and regional deal offers); and (3) an emphasis on coffee/snacking and operational consistency to convert casual customers (accentuated by stand-alone McCafe kiosk/pastry counters in certain locations). We're also intrigued by management's emphasis on creating a customer Experience of the Future flexible enough to accommodate the demographic, competition, taste, and franchisee permutations across its different operating regions while incorporating input from local and regional decision-makers. This is most apparent in McDonald's "big five" international markets (Australia, Canada, France, Germany, United Kingdom), where innovations in each country are establishing a blueprint for more sustainable growth across the entire system.
Although migrating innovations from international markets to the U.S. will take additional time to implement given its size and competitive set, we're becoming more constructive about the longer-term opportunity for the company to return to sustainable comparable sales growth in the mid-single-digit range. Our confidence stems from the recipe changes utilizing higher-quality ingredients and incremental labor investments and training, driving improved speed of service and order accuracy metrics and helping boost comparable sales in the U.S. and helping to improve McDonald's brand perception among consumers even before the successful launch of all-day breakfast, each of which reinforces our wide moat rating. While all-day breakfast exceeded management's expectations and helped to bring back guest traffic, we continue to believe the more important takeaway is that the program went from a single test market to nationwide rollout in just about six months. This implies McDonald's is overcoming its recent supply chain execution hurdles while demonstrating a greater level of coordination across the system, which we believe portends a more seamless rollout for new products, promotions, and other in-store innovations in the future.
We've been encouraged by how much thought has gone into seamlessly integrating McDonald's mobile order and pay and plans for the Experience of the Future initiative, which will be rolled out across most of the U.S. system by 2020 (aided by franchisee co-investment incentives). It's clear that management has put considerable time and resources into developing the platform to scale and adapt to evolving consumer preferences, including new kitchen configurations that can accommodate additional capacity from mobile/delivery orders (through partnerships with UberEats and DoorDash) and an innovative mobile ordering/payment platform that uses geofence virtual-perimeter technology to facilitate customers' mobile order when they are nearing any U.S. location. Mobile order and pay capability has been rolled out at all U.S. locations and more than 8,000 locations across Canada, the U.K., and other international markets. While we don't expect the U.S. Experience of the Future rollout or mobile order and pay to have the same immediate impact as the all-day breakfast, we believe the combination of ordering flexibility (including counter, kiosk, web, and mobile ordering), menu customization (including the ability to custom-build burgers, chicken sandwiches, and salads), customer experience (including a blend of front counter, table service, and curbside delivery), and future loyalty program/targeted marketing opportunities will collectively have a more sustained impact than a platform like all-day breakfast, giving us comfort in our five-year U.S. comparable sales targets in the mid-single-digit range.
McDonald's $300 million acquisition of personalization and decision logic technology company Dynamic Yield is also noteworthy from a strategic standpoint. Most of the headlines regarding the transaction are focused on the benefits to McDonald's drive-thrus, including menu suggestions based on daypart, weather, restaurant traffic, and purchase trends. With roughly 70% of U.S. sales coming from drive-thrus, Dynamic Yield's technology has clear average ticket implications, especially if it can deliver the 10%-15% lift in average revenue per customer that the company has cited in previous case studies. That said, we believe that there may be more significant upside as this technology is integrated into McDonald's kiosks and mobile app. Here, we believe McDonald's can drive more consistent transactions from existing customers while potentially lowering the acquisition cost for new and lapsed customers (via Dynamic Yield's reported reach of 600 million unique monthly visitors), potentially strengthening the brand intangible asset behind its wide moat. We also see two other potential positives from this transaction. One, improved personalization and targeted marketing capabilities has been a recurring theme among other high-frequency restaurant chains in recent years, and this move can put McDonald's several steps ahead of its QSR and specialty coffee chains as the industry continues to shift toward mobile order and delivery transactions. Two, Dynamic Yield has previously stated that it works with over 200 global brands, which could unlock new potential cross-marketing or other partnerships.
We also believe McDonald's solidified its position as a technology leader in the QSR space with the acquisition of Apprente, a voice-based conversational AI platform. The immediate focus of the Apprente team will be improving the customer experience at the drive-thru, which accounts for 70% of U.S. system sales, focusing on speed of service, order accuracy, and peak-hour throughput benefits. However, it's not hard to see McDonald's acquired technologies (which will be part of the new McD Tech Labs that will work closely with its Chicago Innovation Center) as also the foundation of Experience of the Future (EOTF) 2.0. McDonald's has spent several years modernizing its in-store experience, so it's not surprising that its 2019 acquisitions have focused on the drive-thru. However, we believe its acquired technologies offer other benefits, including improved in-store kiosk/mobile ordering functionality, comprehensive targeted marketing efforts, more flexible store labor models, and automated back of the house operations--each of which could benefit the brand intangible asset and cost advantage sources underpinning our wide moat rating. As the company has time to integrate and digest the data from its recent acquisitions, we would not be surprised to see new smaller-format McDonald's EOTF 2.0 restaurant formats developed in the years to come.
While McDonald's full transformation will take time, we're comforted that the company's brand intangible asset moat source is backed by a cohesive franchisee and affiliate system, which collectively operated almost 93% of the chain at year-end, expanding to 95% over a longer horizon through refranchising efforts. This structure allows the company to expand its brand reach with minimal corresponding capital needs while providing an annuitylike stream of rent and royalties, even during challenging economic times. As a result, McDonald's currently generates returns on invested capital in the mid- to high teens, with our model forecasting growth to the low- to mid-20s over the next 10 years. These results are even more impressive when considering that the firm owns 50% of the land for its restaurants (around $5.5 billion in land assets), meaning that the returns are generated on a higher invested capital base than most franchised restaurant chains. We believe considerable land assets provide an additional competitive buffer that most other restaurant firms cannot match.
We also appreciate McDonald's aspirations to be a more agile organization, particularly with respect to making more menu and marketing decisions at the local and regional levels. Although we consider McDonald's size and scale to be a key competitive advantage--the foundation of our cost advantage moat source--questions about the agility of its supply chain have surfaced in recent years, especially in a restaurant industry experiencing changing taste preferences at local and regional levels, a more pronounced consumer shift toward healthier foods, and some fast-casual players reaching critical mass (which we believe have captured a share of McDonald's previous middle- to upper-middle-income consumers). There have been instances when competitors have been able to bring new products to market more rapidly than McDonald's because of raw material procurement constraints, but we are hopeful that impressive speed-to-market for the all-day breakfast launch in the U.S. paired with localized menu decisions will help to alleviate some bottlenecks in the system and level the playing field somewhat.
Our fair value estimate is $215 following McDonald's third-quarter 2019 update, as we continue to have optimism surrounding its various velocity accelerators. Our fair value estimate implies 2020 price/earnings of 25 times, enterprise value/EBITDA of 17 times, and a free cash flow yield of 4.5%.
We forecast 4% systemwide sales growth during 2019, driven by more than 750 net new restaurant openings worldwide and 6% global comparable sales growth, partly offset by foreign currency headwinds. Our model calls for almost 5% comp growth in the U.S. segment, 6% growth in the international operated markets segment, and 7% growth in the international developmental licensed segment. Over the next 10 years, we anticipate 5%-6% average annual systemwide sales growth, driven largely by international unit openings and average annual comparable sales growth in the low to mid-single digits through new menu innovations, modernized customer experience, and inflationary price increases. Factoring in the impact of recent refranchising activity, we forecast a nominal increase in 2019 revenue before mid-single-digit revenue growth resumes in 2020.
We anticipate continued operating margin expansion, with our model calling for more than 3% adjusted operating income growth in 2019, implying 43% operating margins for the full year. We expect company-owned restaurant margins will increase 10 basis points to 17.8% in 2019, as expense leverage is largely offset by elevated payroll costs and other investments. Over the next 10 years, our model assumes consolidated restaurant margins reach 20% because of the operating leverage stemming from comparable sales increases, with adjusted operating margins reaching the low 50s due to the impact of refranchising activity and SG&A reductions.
Restaurant chains are susceptible to cyclical headwinds, including consumer unemployment rates and commodity, labor, and occupancy cost volatility. We expect QSR companies including McDonald's, Restaurant Brands International, Chick-fil-A, Subway, and Yum Brands, to increasingly compete on price and product differentiation while also facing encroaching competition from fast-casual chains like Panera and Chipotle and specialty burger chains like Shake Shack, Five Guys, and In-N-Out Burger. If competition were to cause a decline in restaurant productivity metrics, it could signal impairment of the McDonald's brand intangible asset and negatively affect its intrinsic value. On top of competitive issues, McDonald's must also strike a balance between growth initiatives and unit-level profitability, which can occasionally result in tension between management and its franchisees.
With 60%-65% of total operating profits coming from outside the U.S., McDonald's is sensitive to economic fluctuations across the globe, including currency movements, minimum wage hikes, and negative publicity tied to food quality concerns. Additionally, we believe the company will face more intense competition from earlier-stage restaurant rivals as they develop scale and expand.
While its size affords McDonald's scale advantages, questions about the agility of its supply chain have occasionally surfaced as the company has expanded. Although we agree with management that it possesses an "infrastructure positioned for growth," there have been instances when rivals brought new products to market more rapidly because of McDonald's raw material procurement constraints. We are starting to see signs of improved speed to market through better communication with its key vendors and franchisees and giving local and regional decision-makers more autonomy but believe further supply chain improvements are possible.
The termination of McDonald's CEO Steve Easterbrook in November was a surprise, but we ultimately believe that newly appointed CEO Chris Kempczinski is the best-positioned executive to lead the company going forward. Easterbrook, who separated from McDonald's "following the board's determination that he violated company policy and demonstrated poor judgment involving a recent consensual relationship with an employee," had been instrumental in the company's turnaround efforts since 2015. This includes a successful global segment reorganization, refranchising more than 4,000 locations, and eliminating $500 million in annual SG&A expenses. During that period, McDonald's also undertook several velocity growth accelerators, including (1) an Experience of the Future layout, which features a combination of ordering flexibility, customer experience, and a more streamlined menu; (2) mobile ordering and payments; and (3) delivery alternatives.
When Easterbrook was appointed CEO in January 2015, he was also tasked with adding outside perspectives that would help to develop new growth strategies that capitalized on McDonald's key strengths: its brand, its franchisees, and its scale (also the key components behind our wide moat rating). Kempczinski was one of key hires during this period, joining McDonald's in September 2015 as executive vice president of strategy, business development & innovation following leadership positions at Kraft and Pepsi. Kempczinski had been actively involved with the velocity initiatives--including digital and delivery--and worked with franchisees to adopt these platforms since becoming the head of McDonald's U.S. in January 2017. We also believe Kempczinski's focus on menu innovation (including the rollout of fresh beef burgers), restaurant operations, and international expertise (from his time at Kraft) make him a strong CEO candidate.
We've assigned McDonald's a Standard equity stewardship rating based on its execution struggles--most notably the inability to keep pace with evolving consumer tastes and a competitive global restaurant landscape over 2012-14--but we would consider an Exemplary equity stewardship rating if Kempczinski can develop new velocity growth accelerators while maintaining its commitment to returning cash to shareholders. We like that McDonald's capital-allocation plans continue to balance global expansion efforts, reinvesting in new restaurant openings/renovations/technologies, and returning cash to shareholders. This includes capital structure optimization efforts, refranchising activities outside the U.S., and selling, general, and administrative cost reductions, which could lift longer-term shareholder returns. We're also encouraged that top executives are expected to hold a multiple of their individual base salary in company stock, which provides them with incentive to increase shareholder value. With 10 nonexecutive board members out of 11, we view the board as sufficiently independent, though we would prefer additional outside perspective and declassified terms.
沒有留言:
張貼留言