Is McDonald's Reimaging Carrying Same-Store Sales?
Usually when a restaurant chain such as McDonald's reports growth in same sales, your first instinct is to think, "Its menu changes and/or marketing must be working." In the case of McDonald's, nothing could be further from the truth. The devil is in the details; McDonald's same-store sales growth is coming from its reimaging efforts.
On Oct. 21, McDonald's reported its fiscal third-quarter results. Global same-store sales were up 0.9%. McDonald's credited itself with the very modest gain due to its introduction of Mighty Wings. Its Monopoly promotion was offset by what it describes as an "ongoing challenging environment." Reimaging wasn't even mentioned anywhere in the earnings release.
The reimaging reality
When it comes to reimaging, McDonald's never gives all the details at once. Rewind back to the conference call a year ago for the third-quarter of 2012. It was then stated that McDonald's was targeting 2,400 reimages for 2012.
Next, fast forward a bit to the first-quarter 2013 conference call. Management stated, "We expect to reimage more than 1,600 restaurants this year." This comes out to around 400 per quarter, or 1,200 for the first 9 months of 2013. Add that to the 2,400 in 2012 and get a total of 3,600 reimaged restaurants.
Finally, on Sept. 11, McDonald's participated in an investor presentation at a Goldman Sachs conference. During the presentation it revealed, "... we continue to see average sales lift from our reimage restaurants approaching 6%-7%."
Piecing it all together
That makes 3,600 reimaged restaurants in 2012 and so far in 2013 that on average saw a 6%-7% increase in sales. There were 34,480 McDonald's restaurants at the end of 2012. Divide 3,600 by 34,480 and the result is the percentage of McDonald's restaurants that got a reimage in 2012 and 2013: 10.44%.
This means that 10.44% of McDonald's restaurants got, on average, a 6%-7% increase in sales. Now multiply that 6%-7% (use the midpoint of 6.5%) by the 5.65%, and the result is the reimaging contribution to same-store sales. This is around 0.7%.
Recall that same-store sales came in at 0.9%. This means that 0.7% of the 0.9% increase was just from reimaging. Reimaging saved the day while Mighty Wings, Monopoly, and other menu and marketing ideas apparently contributed very little. The reality is that same-store sales at traditional McDonald's locations only went up 0.2% versus last year despite all of the marketing and menu changes.
Can the economy be blamed?
It's difficult to blame the economy, as McDonald's has done, considering that its close competitors don't seem to be suffering the same type of pullback. Yum! Brands reported on Oct. 8 that same-store sales of its Taco Bell division were up 2%. Much different than McDonald's 0.2% nudge without reimaging.
In fact, Yum! Brands didn't say a word about the economy, let alone that it was a challenge. Yum! Brands did mention, "...overall, the economies in emerging markets are slowed a little bit from what they were a year ago, but are still pretty healthy." Yum! Brands had a 4% increase in same-store sales from emerging markets. Therefore, when Yum! Brands stated it "slowed a bit" clearly it meant "less hyper growth."
Meanwhile, Chipotle Mexican Grill reported blockbuster third-quarter results on Oct. 17. The former McDonald's subsidiary (how ironic) said same-store sales were up an astonishing 6.2%. Its outlook offered "single-digit comparable restaurant sales" for 2013 and "low single-digit comparable restaurant sales" for 2014. There was nothing about the "economy" or a "challenging environment" in its earnings release or conference call. These phrases appear to be unique to McDonald's. Competitors' results suggest that this is a company-specific problem and not a macro problem.
Final foolish thoughts
The really good news here for McDonald's is twofold. One, if it can get same-store sales excluding reimaging back to just break-even, McDonald's would likely show relatively explosive growth once again. Two, the reimaging is clearly working and in a big way. Look for McDonald's to keep reporting updated and new plans for further reimaging in its conference calls. Keep all of this in mind when McDonald's reports same-store sales in the future. Anywhere from 0.5%-1% will be due to reimaging.
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The article Is McDonald's Reimaging Carrying Same-Store Sales? originally appeared on Fool.com.Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill and McDonald's. 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.