McDonald's is thinning out its troops. A layoff notice filed in Illinois on Thursday reveals that the struggling burger giant cut 225 employees loose last month. Most of them were working at its corporate headquarters, and the other 90 were stationed overseas.
Morale at Mickey D's appears to be as lean as its near-term prospects and franchisee margins. Letting employees go doesn't sound like much of a solution.
It's no longer unusual to see McDonald's post another quarter of cascading comps, declining guest traffic in all segments, and smaller profitability, just as it did late last month. That's the new normal at the world's largest burger flipper, coming off seven consecutive quarters of negative stateside comps.
The only real surprise is that investors have forgiven McDonald's. The stock is trading within a Happy Meal of its all-time high, even though it's a shell of the market leader that it was two years ago.
Mr. Market has forgiven McDonald's because it's an iconic brand. The fat dividend that has continued to inch higher even with its decaying fundamentals -- translating into a yield north of 3.4% -- is also a dinner bell to income investors who don't seem concerned about the percolating payout ratio.
Investors also seem to be dismissing the mindset of the franchisee. More than 80% of its restaurants are operated by franchisees, and they're the ones feeling the sting of sliding guest counts, the public outcry for higher wages, and questionable margin-squeezing moves from HQ such as this summer's promotion offering fries and either a double cheeseburger or 10 McNuggets for $2.50. That may be a compelling value proposition for hungry drivers, but it also eliminates the highest-margin offering at McDonald's -- soft drinks -- from the bundled equation.
Franchisees have good reason to have their confidence rattled. The 135 layoffs at corporate headquarters may not affect them directly, but that's dozens of fewer minds trying to drum up a way out of the malaise.
The comps won't fall forever. McDonald's will eventually hit on a hot menu item or something will happen to turn the unflattering consumer perception of the quality of the food and service at the chain. However, that investors are holding on to the stock here near its all-time highs would seem to suggest that McDonald's is close to a solution. The problem is, it's not. It seems as if every few months the strategy changes, and that has to be as confusing for the company as it is for the consumer.
Does McDonald's want to simplify its menu, as it has stated often, or are we to believe the actions of a company that keeps adding new toppings and items? Does it want to appeal to consumers craving healthier dining options, or is the strategy to continue to court the masses with its traditional fried fare?
McDonald's has an identity crisis, and that's bad, but perhaps it's not as bad as investors who have kept the shares so high by misidentifying the identity of McDonald's.
The article McDonald's Is a Bigger Clown Than Ronald originally appeared on Fool.com.
Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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