McDonald’s is floundering. And I know why… and how to fix it.
The company has missed earnings for at least five quarters in a row. And every time, management comes up with some new gimmick to try and turn the revenues and earnings momentum around.
They tried offering more menu items, until the number of orders was overwhelming and the menu looked like an unintelligible mish-mash. Then they cut a bunch of menu items to make it simpler and rearranged the Dollar Menu items.
They brought back the McRib — perhaps the grossest sandwich ever made. They offered buffalo chicken wings, which were a colossal failure.
Over the weekend, I saw a commercial touting McDonald’s latest ploy to get customers. Apparently you can now create your own combo meal. Instead of just the traditional “burger, fries, soda” meal, you can now make different selections.
Maybe you want “burger, salad, water.” Or maybe it’s “burger, cookie, soda.” You can even add premium ingredients like guacamole or a fried egg to your burger.
McDonald’s calls it “Create Your Taste,” but it’s clear what the company is really doing: McDonald’s thinks its customers want healthier options like salads.
Unfortunately, McDonald’s is completely wrong.
Sure, you could look at restaurants like Chipotle or Panera and conclude that people want salads and other healthy foods. But that doesn’t explain the success of burger chains like Five Guys or recent IPO success Habit (NASDAQ: HABT) or the much-anticipated debut of Shake Shack, which just filed for an IPO.
Where’s the Beef?
Yeah, I’m old enough to remember those classic Wendy’s commercials where the grouchy old lady takes one look at a McDonald’s-style burger and asks, “Where’s the beef?”
People want to eat cheeseburgers. The success of a company like Five Guys proves this.
The solution for McDonald’s isn’t salads and fresh fruit — it’s going back to basics and making a decent burger. It’s the KISS principle: keep it simple, stupid.
I’m probably going to submit a job application to become McDonald’s new CEO based on this idea.
So while I get my cover letter ready, let me share with you an investment that my colleague wrote about a couple weeks ago.
Here’s Nick Hodge’s recommendation…
Good Times
Good Times Restaurants (NASDAQ: GTIM) operates burger joints.
But not pink slime burger joints. All natural, steroid-free, hormone-free, vegetarian-fed, and humanely-raised burger joints.
Good Times Burgers & Frozen Custard currently operates 26 company-owned and 11 franchise locations.
It also operates and franchises Bad Daddy’s Burger Bar, currently with 10 locations.
Its expansion is being led by the former VP of Franchise Sales for Buffalo Wild Wings, which he grew from 50 to 500 restaurants.
It owns 100% of Good Times, 100% of Bad Daddy’s of Colorado, and 48% of Bad Daddy’s Franchise Development.
An expansion into 14 states is under way. Current markets include Colorado and Wyoming. It’s already been ranked #1 in Colorado by Sandelman Quick-Track for quality, freshness, and friendliness.
It’s the only quick service restaurant (QSR) to offer steroid-free, hormone-free, vegetarian-fed, and humanely-raised beef and chicken. Its custard is made every few hours and is considered “premium,” meaning it contains 10% butterfat and 0.4% egg yolk.
The custard is also made with a proprietary Madagascar vanilla blend, with minimal air to create smaller ice crystals.
Its lemonade is fresh-squeezed.
The results speak for themselves.
Same store sales growth (SSSG) was up 3.1% in 2012, 11.9% in 2013, and 14.6% this year.
Average store sales are up from $750,000 in 2010 to just over $1 million this year. Cash flow has tripled in that time.
It has $8 million in the bank and no debt. It’s positioned in both the fast food and casual dining spaces with its two lines. Same store sales growth has been in the double digits for the past 17 months consecutively.
And it still has plenty of upside with less than 50 existing locations for both brands.
Right now it’s only a $50 million company with 9.5 million shares outstanding. So it’s still very small, but with a tight share structure.
Good Times stock currently trades around $6. Its market cap is just under $50 million. And I agree with Nick that it looks like a pretty good investment at this level.
If the company executes its expansion plans, this stock could easily double.
Until next time,
Until next time,
Briton Ryle
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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
