McDonald's Opens For Christmas: A Sure Sign Business Is Maxed Out

By Will Ashworth | December 20, 2012 AAA

McDonald's (NYSE:MCD) chief operating officer (COO) for the United States is Jim Johannesen. In early November the COO sent a memo to franchisees asking them to consider opening their stores on Thanksgiving and every day through the rest of the holidays. Godless heathens? Hardly. Christmas Day generates huge revenue.

In October, the world's biggest fast food restaurant saw its global same-store sales decline for the first time in nine years. Has McDonald's hit the proverbial wall? Doesn't opening on Christmas Day scream of desperation? What will this do to its stock which is already trading just 8% off a 52-week low? These are just some of the questions investors should ask about its move to conquer Christmas; You can bet I will.

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Thanksgiving
No disrespect meant to those who don't follow the customs of Christmas, but this is the one day on the calendar where less is better. Spending time with your loved ones in a world where people go 24/7, it's important that everyone take a break. Retail stores opened earlier this past Thanksgiving; Walmart (NYSE:WMT) chief among the culprits pulling workers away from their family celebrations. Apparently many McDonald's locations listened to their boss' plea; Thanksgiving Day contributed approximately 40% of its 2.5% same-store sales growth for November. In fact, something like 6,000 additional locations opened this year at Thanksgiving with the average additional revenue estimated at $36 million, for just one day.

SEE: How To make Extra Money At Christmas Time

Christmas
Those were impressive numbers hence the second memo from the COO December 12 focusing on the benefits of opening on Christmas. If McDonald's entire system opens on Christmas Day this year, it could mean an additional $84 million in revenue. That's huge considering as recently as five years ago, a Christmas Day opening was absolutely unheard of. It's made more difficult by the fact many of its competitors including Starbucks (Nasdaq:SBUX) will open on Christmas Day making it absolutely essential to follow suit. Sadly, despite it being a holiday, McDonald's in the U.S. pays its employees regular wages. In Ontario, where I live, McDonald's is required by law to pay an employee who works Christmas Day or any other statutory holiday a day's holiday pay (based on the average daily wage for the previous four weeks worked) plus 1.5 times hourly pay for the time actually worked on Christmas. It's a much better deal for employees than those south of the border. It's easy, however, from a business perspective, to understand why it chooses to open. It's like printing money.

Investors
COO Johannesen is clearly trying to push any button he can to keep McDonald's from stalling out. Unfortunately, after Christmas, he's pretty much out of holidays to make up for the sales shortfall. A combination of poor promotions along with increased competition from Wendy's (Nasdaq:WEN) and Burger King (NYSE:BKW) has it wondering when the good times will return. The COO doesn't expect better numbers until the summer of 2013. With its stock seriously underperforming both the restaurant industry and the S&P 500 over the past year, it definitely isn't a good time for its stock. If you already own it I'd hold and continue to enjoy its decent dividend. If you don't or want to add to your position, I'd wait for one of two things to happen: either its monthly sales pick up with at least a 5% growth or its stock drops below $75. If you see either of these, I'd be buying.

SEE: McDonald's: A History Of Innovation

The Bottom Line
McDonald's had a good run with nine consecutive years of positive total returns up until 2012, which looks to be a loser unless some really good news surfaces between now and the end of the year. Reversion to the mean suggests its stock is now fully in a funk. Only patient money need apply. Look for 2013 to be another mediocre year or worse. By 2014 it should have figured out its next big move. Opening at Christmas is not a permanent solution.

At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.

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