What did you have a beef with? Oh, that's right, McMargins? In absolute terms, don't you think that gross margins of 36.3% -- as was the case last year -- is pretty darn amazing for any fast-food company? Let's go one step lower, to operating income. Sure, operating margins have slipped from 26.9% to 25.0% since 1994, but isn't the 1999 figure amazing anyway? In relative terms, Wendy's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WEN)") else Response.Write("(NYSE: WEN)") end if %> had record margins last year and could only mustard 16.7% margins.
But, wait a minute, Bill. Actually, let's wait another two minutes beyond that so we can get a fresh batch of golden French fries. Any discussion of margins must include the fact that, in those five years, the growth of company-owned restaurants has outpaced the franchised ones. Since your 1994 starting line, systemwide franchise sales have grown by 39%. Meanwhile, revenues at company-owned locations have soared 64%.
You see, Bill, the company is rolling its own more and more. As you can imagine, there is a big difference between franchise royalty payments that drop practically unencumbered to the bottom line and the juicier bounty of company operated units, which come saddled with the operating overhead. They're both good, but each one provides unique kicks to the bottom line. The franchised units prop up margins, while the company-owned locations contribute more to the top and bottom line.
But the ultimate problem I see with my worthy Fool's pessimistic case is the very theme he raised -- location, location, location. He builds a bleak picture of McDoom, but he does so using hollow lumber.
"The growth rate is slowing rapidly," he writes. Did Bill really mean this, or was he laughing so hard that his vanilla shake came spewing out of his nose and smeared the first quarter financials? Sales grew 10% for the March quarter (13% in local currencies) -- and that is better than the company has fared over the past one, three and five year annualized period. Earnings per share rose 14%. Momentum is on the bull's side.
McDebt? Bill is troubled by the rise in debt over the past five years. The fact that sales and profits have grown as well during that time is lost on him. But obviously McDonald's thinks it has it all under control. While the company may have $5.6 billion in debt, a $4.5 billion share repurchase plan is well underway -- a commitment that has already wiped more than 50 million shares outstanding off the rolls.
This isn't Wimpy, trying to mortgage Tuesday for a hamburger today. This is McDonald's. This is the world's top brand that has produced systemwide sales just shy of $40 billion over the past year.
But does that mean the good times are over? I don't think so. Consider this amazing McNugget that as popular as McDonald's is -- on any given day -- it serves less than 1% of the world's population. So have they used up the prime real estate stateside? Possibly, even though I can't see why Bill is discounting the merits of having a hotel on Boardwalk and Park Place. Yet saturation overseas is probably decades away. Actually, I thought it was a nice touch that when the company opened up Store 25,000 it chose to locate it just a few miles from the 1955 original to prove a point.
And Bill is spooked by minimum wage hikes. Yes, that's right, all those entry level kids making more money. I wonder where some of that extra disposable income will be spent? Could it be, hmmm, McDonald's!
Then Bill wants to impeach Mayor McCheese just because the chain has tinkered, and sometimes failed, with new menu offerings. He wants to take the company to task for buying Boston Chicken. I'm sorry, but I can appreciate a company that knows it's number one but is willing to take chances. Who wants to place a market order to buy complacency? Do you know what the top restaurant chain was when McDonald's set up shop? Howard Johnson's. That's right, HoJo's. But McDonald's has thrived since then, decade after decade, because it won't settle for stagnancy.
Boston Chicken was just one of the company's minor purchases (like Donato's Pizza and Chipotle Mexican Grill) to help the company cater and ultimately understand the mature taste buds that aren't wowed by the Happy Meal tie-ins with Disney <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: DIS)") else Response.Write("(NYSE: DIS)") end if %> or whatever the flavor of the month might be. It's all about home meal replacement and McDonald's wants to spread its bets when it can wager at low-risk prices. It bought the Boston Market chain in bankruptcy court after the company had closed down all of the unprofitable locations and been cleared of debt -- for pennies on the dollar. Not too shabby.
So my bearish bud waves the all too familiar argument that XYZ Company is trading at historically high multiples. What company isn't? But if you're going to invest you might as well put your money where you mouth is. Right Bill?
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