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In recent years, customers have come to view McDonald's (NYSE: MCD) hamburgers as sad, lifeless grey patties priced for value. However, the fast food king has been working hard to reshape its image. Over the last year, the maker of McNuggets has shifted its quarter pound hamburger patties from frozen to fresh beef in a move to keep up with competitors. How has this strategy worked out for the Golden Arches, and what does it mean for investors? Let's take a look.
About a year ago, McDonald's added fresh beef to its menu in the form of juicy quarter pound burgers. This move was partly in response to competitors, such as Shake Shack (NYSE: SHAK), In-N-Out Burger, and Wendy's (NASDAQ: WEN), who have been serving up fresh beef patties for years.
In the first month that the fresh beef quarter pounders were added to the menu, sales of the burger surged 50% year over year. In the first quarter of 2019 alone, McDonald's sold 40 million more quarter pound burgers compared to the same quarter last year.
"We're proud that taste and food quality drives sales. Our numbers speak for themselves, with the introduction of fresh beef and the promotions including fresh beef quarter-pound burgers helping result in a sustained quarter-pound burger sales increase 30% on average throughout the entire first year." - Chris Kempczinski, President McDonald's USA
Although McDonald's does not break out its sales by product, based on an average price of $3.79 for a quarter pounder, we can estimate that the sales lift in these burgers would have added an additional 3% to 2019's first quarter sales. This is fairly significant, particularly when you consider that the global comparable sales increased by 4.5% over the last year.
Pulling back, we find that both gross and net margins are up by nearly 500 basis points and earnings are up by 18% over the last year. Although demand for the quarter pound fresh beef wasn't the only contributing factor (all-day breakfast has been a hit), it certainly has added fuel to this momentum.
Management delivers velocity
The move to fresh beef is part of McDonald's larger strategy to dish out speedier service and tastier menu items via sleek, futuristic stores replete with self-serve kiosks and mobile order pick-up stalls. Management launched the plan in 2015 and since then, earnings have grown at healthy clip of 16% since then, helping fuel a 120% surge in share prices over the same period. Returns on invested capital, the amount of earnings the company generates divided by the sum of shareholder's equity and the company's debt, has remained above 15% over the last five years. Think of this as how well management is using earnings and generating returns for shareholders.
So, for investors, what does this mean? Legendary investor Warren Buffett has said for years to buy great companies run by rational management among other things. What he means that investors will be richly rewarded if they can find a company whose manager's make smart decisions that reward shareholders. In the case of McDonald's, with its move to fresh beef and its larger mosaic of a successful turnaround plan, we can certainly check off this box.
Although McDonald's is perhaps better known for serving up sad hockey pucks historically, the company took the bold step of adding fresh beef to its menu over the last year. This move caused customers to salivate and delivered outstanding results. For investors, this move and the larger success of the company's turnaround plan pins down evidence that McDonald's management is grade-A quality, and should continue to serve up great results for investors.