Finance | December 2017 | By Danny Klein

Why 2018 Could Be McDonald's Best Year Ever

This past year has been one to remember for the fast-food giant.
A McDonald's restaurant is seen with its drive thru. The restaurant is hoping to add recycling at all locations.
McDonald's could be headed for a historic year in 2018. McDonald’s / Lynn Cromer
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Here’s a pretty eye-opening fact: Since early 2015, when Steve Easterbrook was named McDonald’s CEO, the fast-food giant’s stock has more than doubled. It’s 46 percent higher so far in 2017 alone. In fact, it hit all-time highs every single day this week, as The Motley Fool points out.

But what makes this intriguing (especially for investors) is the reality that McDonald’s hasn’t hit its stride yet. Let’s turn back to 2015. McDonald’s was coming off two years of declining sales and profits. Don Thompson stepped down after nearly three tumultuous years, and Easterbrook, who spent much of his career in Europe, took the job. In 2006, he helped boost McDonald’s U.K. business as CEO and was named president of McDonald’s Europe in 2010. He left the company a year later to lead two separate British chains—Pizza Express and Wagamama—but was lured back in 2013 as global chief brand officer.

Easterbrook first unveiled his turnaround plan in May 2015. “The immediate priority for our business is restoring growth under a new organizational structure and ownership mix designed to provide greater focus on the customer, improve our operating fundamentals, and drive a recommitment to running great restaurants,” he said at the time.

That July, McDonald’s began operating under a new organizational structure with the following market segments: the U.S.; international lead markets (Australia, Canada, France, Germany, and the U.K.); high-growth markets (China, Italy, Poland, Russia, South Korea, Spain, Switzerland, and the Netherlands); and foundational markets (the remaining markets in the McDonald's system). He also announced McDonald’s plans to refranchise 3,500 restaurants through 2018. All of this expected to save the brand $300 million annually. McDonald’s long-term goals included returning $22 billion to $24 billion to shareholders through dividends and share buybacks over the ensuing three years.

“Our new structure will be supported by streamlined teams with fewer layers and less bureaucracy, and our markets will be better organized around their growth drivers, resource needs, and contributions to the company's overall profitability,” he said.

His menu changes were equally compelling. All-Day Breakfast, fresh beef Quarter Pounders, cage-free eggs by 2025, removing artificial preservatives from Chicken McNuggets, eliminating high fructose corn syrup from the buns used on Big Macs, Quarter Pounders, hamburgers, cheeseburgers, Filet-O-Fish, and McChickens.

Then there were the innovations, like mobile order and pay in 20,000 restaurants by the end of 2017, part of McDonald’s “Velocity Growth Plan.” Delivery in 3,500 restaurants this past summer. The Experience of the Future restaurant design, which contains kiosk ordering and table service. McDonald’s planned to reimage about 650 restaurants in 2017 to the design and said it intends to update most of its free-standing U.S. locations by the end of 2020. Most recently, McDonald’s announced that a tiered, new dollar menu called the $1 $2 $3 menu, is coming in January. This should further the brand’s success with premium items offsetting value-based ones. Items such as Signature Crafted Sandwiches and McCafe beverages have been a hit with consumers, McDonald’s has said in recent reports. Hey, McDonald's even brought the McRib back.

Perhaps the best metric for McDonald’s is guest count. Customer traffic dropped in each of the last three fiscal years before they started to climb in 2017. The chain welcomed 0.6 percent more customers in the first quarter. That improved to 1.8 percent in the second quarter—a period that saw same-store sales grow 6.6 percent—the brand’s best comps growth in five years. In the third quarter, guest counts rose 2.1 percent. Same-store sales, by the way, are up 5.6 percent through the first nine months of the year. Even Burger King, which has had a very strong run in 2017, has seen its comps grow only 2.6 percent in that same period. Taco Bell is up 5 percent.

Returning to the present, The Motley Fool’s Rick Munarriz believes the brand, which has never been as valuable as it is right now, will be worth even more a year from now.

Here’s why:

While McDonald’s has posted year-over-year revenue declines for 14 consecutive quarters, much of that can be attributed to refranchising. More than 90 percent of the company’s 37,000 locations worldwide are franchised. This year, McDonald’s reached its target of refranchising 4,000 restaurants more than a year ahead of schedule after refranchising locations in China and Hong Kong. Over the past three years, McDonald’s has increased its franchised unit ratio from 81 percent to 91 percent of all units.

Munarriz explains that refranchising means exchanging unit sales with smaller franchisee royalty payments. However, margins expand and the bottom line improves. Point: revenue declined 6 percent through the first nine months of 2017, but operating profits rose 28 percent.

Munarriz writes that analysts are modeling a profit 7 percent ahead of 2017’s success next year, and 23 percent more than 2016. It’s unlikely the chain’s stock will appreciate similar growth as 2017, but there’s no reason to think it can’t be higher than it is right now. That would mark the fourth year in a row it has gone higher than the previous year with Easterbrook as CEO.

Easterbrook has been rewarded as well, of course. He saw his compensation nearly double to $15.4 million from $7.9 million the prior year, according to a Securities and Exchange Commission filing. Easterbrook’s base salary increased 24 percent to $1.3 million. Stock and options were up 80 percent to $9 million, and his incentive pay was $4.6 million.

Additionally, Easterbrook earned $523,665 in perks, including use of the company aircraft for personal trips, contributions to a retirement plan, life insurance, and car allowance.

All of this is assuming McDonald’s simply makes good on its promises, which recent history tells us it will. It doesn’t take into account anything the chain is cooking up that it might be keeping close to the vest.

However you view it, it’s hard to refer to McDonald’s current success as a turnaround story anymore. That bar has been hurdled. Now, it’s just a matter of seeing how high the brand can climb.