McDonald’s Corporation (MCD), is shedding $500m worth of overhead costs by the end of 2017, trimming down the menu, offering an all-day breakfast, and relocating their operation back to the city, are just some of the notable changes CEO Steve Easterbrook has undertaken during his short term with the fast food giant. Shareholders have responded well to the announcements, and the stock has improved by 31% over the past 12 months, outperforming the rise in the S&P 500 Index. The all-day breakfast drove up sales for two consecutive quarters, the company said in late April.
The market reacted to news of the move, planned for 2018, with a nudge in the stock value, which improved by 1.27% in late Monday morning trade however, it has started falling in the morning session on Tuesday. Easterbrook said in a news release Monday, “We are a brand on the move in more ways than one, moving our headquarters to Chicago is another significant step in our journey to build a better McDonald’s. This world-class environment will continue to drive business momentum by getting us even closer to customers, encouraging innovation and ensuring great talent is excited about where they work.”
McDonald’s joins Motorola Mobility, Motorola Solutions, and Kraft Heinz in their suburban exodus, in search of urban real estate, and began its search for new address last year.
The company will become the tenant of Sterling Bay, property developers in the city, after they acquired the former Oprah studio for $30.5 million in 2014. The former Harpo studio will be razed to make way for a new 300,000-square-foot space. Whilst zoning approval is still outstanding, it is not expected that this would present any impediments to the move. It is not immediately clear whether McDonald’s would retain its Oak Brook facility, either at all, or in part. Oakbay has been home to the Hamburger University training facility and 2000 employees for approximately 4 decades.
McDonald’s remains a stock picker certainty, with the risk vs return balance tilted firmly in its favor. This is underpinned by good cash flow from operations, an acceptable return on investment and an improving profit margin, and it is felt that this outweighs its appetite for high debt levels.
Whilst the net earnings growth for quarter one, year on year, exceeded the S&P 500 Index, it remains below the hotels, restaurants, and leisure sector average. But return on equity for the same comparative period showed significant improvement, and exceeded the hotels, restaurants, and leisure benchmark.
Gross profit margin for McDonald’s Corporation, considered strong at 46%, and represents an increase over the same period last year, at 18% the net profit margin is better than sector average. For the same period, net operating cash flow increased to $1,719.10 million or 1,15%, which is lower than the industry average of 13,75%.
Second only to the US Government, the food service industry employs over 12 million people, and is both positively and negatively susceptible to changes; in household income, threats of personal safety for a variety of reasons, severe weather, and health epidemics.