I have been posting on my observations of local fast food places: Wendy’s fail. Tim’s not a lot better. Arby’s doing OK. Mickey D’s fully open and doing brisk business.
But the MBA’s just can’t help themselves. They feel compelled to use tricks to juice their numbers.
Mickey D’s numbers were touted as “better than expected”. Their press release bragged “Global comp sales increase 10%”, “US comp sales up 6%”. But, if you look at the tables, revenue, operating income, net income, EPS were all down.
Funny thing about the press release. There is an income statement, but no balance sheet. Their 2021 annual report has a balance sheet: $4.6B of negative equity. That is an improvement from the $7.8B of negative equity in 2020. What irks me is Mickey D’s has a nice business. Their stores are well liked. Why do they feel compelled to indulge in financial trickery to juice their numbers? (that’s a rhetorical question)
I have commented a couple times, they raised the price of a pop. Used to be any size pop was $1. They held that price for years. This year, a big pop went to $1.29. They don’t have a “small” meal. The smallest they have is a “medium”, but a Big Mac “medium” meal is still well under $10. The things I like at Wendy’s and Tim’s are almost all over $10, in spite of those franchises, at least around here, refusing to pay enough to adequately staff their stores. Arby’s is offering $14-$15. Mickey D’s pays $16/hr.
I want to like Mickey D’s. Their stores are popular, and, at least around here, they are willing to compete for labor, rather than crying for the TV camera “no-one wanna work”. Why resort to financial trickery?
The journey to losing 50 lbs meant changing entirely away from eating in those places otherwise.
I go to Costco and Trader Joes about twice a week. The same staples with small changes every month. For excitement I will have something sweet or something salty a couple of times a day. In that I have control over the calorie count while getting a bit of my fix.
Just brewing a really good coffee pot twice a day or the Kirkland Italian sparkling water keeps me in my fixes.
At the end of the day I find my groove in eating a carrot.
This doesn’t seem like the MBA’s have juiced the numbers - rather, that some of the press people in investor relations put out a press release that only emphasized the good numbers and ignored the bad ones. That’s not really using “financial trickery” to juice the numbers. That’s PR, not accounting, putting lipstick on the pig.
Tangible book value: Q4, 21: -$7.3B, Q1,22: -$8.8B, Q2,22: -$9.0B
Net debt: Q4,21: $30.9B, Q1,22: $31.6B, Q2,22: $32.7B
Shares in treasury Q4, 21: 915.8m, Q1,22: 921.1m, Q2,22: 924.9m
These are the sort of trends I flagged at Boeing, several years ago. Like Boeing, Mickey D’s has a nice business. But they start manipulating the numbers, and they can’t stop, because they always want to be “better than expected”. By conventional measures, they owe more than they own, Mickey D’s is bankrupt.
Wouldn’t the quarterly reports on Yahoo Finance be coming from McDonald’s balance sheet numbers?
I guess that’s where I’m not following you. It sounds like they’re properly reporting their numbers in their actual financial statements - just not highlighting the bad ones in their press release? Is that uncommon for the PR department?
Off the top of my head, I don’t recall seeing anyone else’s quarterly that did not have a balance sheet. But then noticing the headlines in the press release were “rah rah rah, everything is up”, when the actual numbers were down, combined with the media narrative that everything was “better than expected” made me look closer at everything.
As the Yahoo tables do not include Q3, I assume that Yahoo takes the numbers off the SEC filings, where a balance sheet is required. I looked around the MCD Investor’s page, and the only thing that had a balance sheet was the annual report.
But it isn’t the PR department that is making shareholder’s equity fall farther and farther into negative territory, nor increasing net debt, nor increasing stock buybacks. That comes from the corner office.
Ah. Well, this financial paper explains why McDonald’s (and a bunch of other fairly profitable restaurant companies, like Starbucks and Yum! Brands), have that type of balance sheet arrangement.
TL;DR - because borrowing is so cheap, these companies have been able to return more than 100% of their earnings to investors by borrowing. They’re able to borrow because “of the wide spread between its return on assets and cost of liabilities. Each has negative net working capital, which is essentially a cost-free source of funding, and was able to issue massive amounts of debt at low single digits rates.” And they’re able to do that because they don’t actually have negative equity, but have a huge amount of their equity in an intangible asset (their brand and other operational systems) that allows them to earn a ton of money on a relatively low tangible asset base.
The even shorter version is that those companies hold huge non-booked intangible assets that they (probably appropriately) decided to shift from pure equity to a more leveraged mix of equity and debt, given the incredibly low cost of borrowing.
Bubblevision was full of talking heads explaining how the 2007 RE bubble was sustainable. “Tax cuts for the rich will pay for themselves”, we were assured, when the US Federal debt was 1 lonely Trillion. You can bend the numbers to support any predetermined narrative you want to push.
Coke enjoys the same benefits you cite for restaurant franchises, but equity bounces around a positive $23B. Net debt bounces around $30B. Treasury shares bounce around 2.7B. Coke is sustainable because they aren’t dependent on making those numbers progressively worse. Mickey D’s is making those number progressively worse, like they think they are Shiny-land and can run debt to infinity.
Keep in mind that McDonald’s is a franchise. McDonald’s Corporation doesn’t actually own many of the restaurants. (I think they may own much of the real estate to control location selection, but not the buildings and equipment.) They don’t have to have a lot of money tied up in assets. They make their money from fees collected from the franchise owners and from selling various things (food, branded supplies) to the franchises. And even that is going to be shipped directly from the producers of those goods directly to the franchise. So not much inventory. Not much fixed assets. But a brand name that is basically the entire value of the company.
This is one of the few places where my CPA self has to yield to the MBA self in recognizing the shortcomings of accounting based on historical costs.
Yesterday was set-up deer stands day, took about 4 hours.
After that, we went to a local bar. This is sticksville, about an hour away from home, but it’s a pretty popular area, 1 of Michigan’s nicest inland lakes is in the immediate area. Basic burger, with chips ( no sides ) and a beer, plus tip was $25 each. It was a decent burger, but I’m talking basic bar grub. Place was 1/2 full on what is a work day for people with jobs, lol. Americans are still spending money.
I’ve been in your part of Michigan more than a few times, it’s a nice and affluent area. If those fast food joints can’t figure out how to make a buck there, they should give it up. Densely populated, people short on time and with money to spend, all of those places should be doing well.
I never paid attention to the financials at McDonald’s. Of course, I’ve never seriously considered buying the stock.
I wonder if the negative net worth is related to the movie Super Size Me. I was so grossed out by the movie that I’ve been avoiding McDonald’s ever since. BA-DA-BA-BA-BA! I’m hatin’ it! At the time I last ate McDonald’s (spring of 2004), you could have bought a brand new Oldsmobile.
As long as there are plenty of diehard junk food junkies out there, McDonald’s is in a good position. (Of course, there’s always a chance that poor management could mess it up.) Given that McDonald’s eliminated the “healthier” items from its menu (the salads and the grilled chicken sandwich) but has kept all the deep-fried items, the artificial sweetener bombs, the sugar bombs, and the high fructose corn syrup bombs, the Golden Arches has doubled down on the diehard junk food junkies.
If there’s ever any mass movement towards healthier eating, that would be bad news for McDonald’s. What the infrequent customers do isn’t relevant, because they might be responsible for something like 0.2% of the revenues. What the diehard junk food junkies do is critical, because they’re responsible for most of the revenues. Anything that reduces their numbers would be bad news. In that situation, McDonald’s would be caught between a rock and a hard place. Trying to appeal to more health conscious people may alienate the the remaining diehard junk food junkies. On the other hand, efforts to lure the remaining diehard junk food junkies from the competition would only reinforce their dependence on this group. In that scenario, some major fast food chains would go under due to a shrinking market.
I’d love to see McDonald’s, Burger King, Wendy’s, Kentucky Fried Cholesterol, Hardee’s/Carls Jr., Popeyes, and Arby’s competing for survival. I’m not sure which one I’d root for.
Well, from your own account, you’re back to dipping your toes in the junk food waters, right? Given that your Righteous Eating was also a temporary phenom sparked by Covid, it seems to me that your take on this topic is a bit disingenuous…sanctimonious, even.
For the halibut, I looked up net plant and equipment for MCD and KO. MCD’s total assets, at the end of 21, totaled $53.854B, of which $24.720B was plant and equipment, net of depreciation. KO had $94.354B in Assets, of which plant and equipment, net of depreciation, totaled $9.920B. The numbers I see say MCD is much heavier in fixed assets than KO, but MCD is leveraged out of it’s skull.
KO’s Q3 report included it’s balance sheet, while MCD’s did not. MCD boasted everything was up, when revenue, gross profit, and net profit, were all down. KO boasted everything was up, while revenue, gross profit, and net profit, really were up.
A post upthread noted that several other restaurant chains have negative equity. I submit that that could be a function of Shiny management, that hollows out a company to juice the numbers, and fatten management’s bonus, over the short term.
The Mickey D’s around here certainly seem popular. The one I looked at several days ago had two drive-up lanes going, with several cars in each lane, while the Arby’s down the street only had one or two cars at the drive up. Drove past another MCD today. Same thing, about 8 cars lined up, vs 2 at the Arby’s down the street.
My instinct says to love Mickey D’s, but my number crunching says management is Shiny.
Wendy has mentioned her concern about “Zombie” companies which have negative book values and which may not be able to payback their leverage. I think that the article is basically saying that if the cash flow is greater than the debt service plus costs, the dividend can be boosted from the capital supplied by the loan. This works as long as the loan is long-term, but at some point the piper has to be paid - either by a sinking fund, a sudden “unexpected” trauma or refinancing at then-current interest rates (or bankruptcy). This is a strategy which favors the “trading” mentality which affects the stock price of the company as well as benefiting management employees whose compensation is attached to that metric, but increases the eventual risk to the health of the company.
On the other hand, if the loan is of short duration, then the problems become obvious. Refinancing becomes immediately more expensive and the debt service can be damaging without the ability to recoup.
Using the explanation that “goodwill” makes up the difference is just that - a justification for an “I want it now” philosophy.
(Who pioneered this concept back in the late 1970’s when he used the concept while leading his group to an overwhelming victory (based on stock price) in the Harvard Business Game as the cherry on top of his MBA program)
Actual commodity companies like Morton Salt are run for the management. The shareholders are less of an issue. These companies are low margin or the competition will come in and win. Salt anyone can trade in it.
In the process of running the company for the management a larger debt load is created to pay the management.
We are seeing that in the fast food industry, minus a player like Chipotle because they are still getting a premium.
When I was in B-school, in the 70s, we talked about the risk to companies of carrying a lot of leverage. Basically, it works great, as long as things are going up. Leverage also amplifies moves on the downside, and the company doesn’t have a financial cushion to fall back on.
You’re comparison of a “trading” mentality is a good shorthand for it. Seems that the Shiny management strategy today has two rules:
1: see money
2: take it, all of it, don’t leave anything for your successor.
How long after Welch left did GE hit the wall? How long after McNerney left did Boeing hit the wall? (retired as CEO July 2015, retired from the BoD March 2016. First 73 crash that exposed their shoddy design October 2018. Shoddy assembly and QC at the 78 plant exposed 2019)
This is “good business practice” in Shiny-land. Is Eddie Lampert stabilizing and securing the future of K-Mart and Sears? Nope. He’s looting them. Did the PE group that bought Art Van Furniture in Michigan secure the future of the company? Nope, they looted it and dumped it into bankruptcy in three years.