McDonald's vs. Wendy's Inventory Case Study

Calculating Inventory Turnover on the Balance Sheet - McDonald's Example
••• McDonald's Corporation

McDonald's and Wendy's both have transformed since they were used as examples in an investing lesson on balance sheet analysis in 2009. In the time that has passed, McDonald's conducted a split-off of Chipotle Mexican Grill, making it an independent company, while Wendy's was acquired by roast beef chain Arby's, which then reorganized the business, sold the Wendy's division to Roark Capital Group in Atlanta, and emerged as a "new" Wendy's.

If you pull the Form 10-K for Wendy's for the 2019 Wendy's Company, you're not going to get the figures used in the original lesson because the old Wendy's that Dave Thomas started is now non-existent and buried in the Securities Exchange Commission (SEC) archives. Instead, you'd be looking at Arby's historical figures.

Regardless, the concept itself is timeless so for the sake of simplicity—and partly for the sake of nostalgia—the 1999 and 2000 figures from the original lesson are fine for practicing the calculation. The inventory turn calculation hasn't changed, so there is no disadvantage to doing so.  

Calculating Inventory Turn By Comparing McDonald's and Wendy's

It's easy to see how a higher inventory turn than that of competitors translates into superior business performance. McDonald's is unquestionably the largest and most successful fast food restaurant in the world. That shows up in the historical numbers: the superior execution, the better returns on capital, and the benefits of its real estate structure.

Use the inventory turn formula—cost of goods sold divided by the average inventory values—to come up with the number of inventory turns for each business using this historical balance sheet example, showing the inventory turnover calculation for both McDonald's and Wendy's:

 

McDonald's

 

 

2000

1999

Inventory on Balance Sheet

$99,300,000

$82,700,000

Cost of Goods Sold on Income Statement

$8,750,100,000

 

 

Wendy’s

 

 

2000

1999

Inventory on Balance Sheet

$40,086,000

$40,271,000

Cost of Goods Sold on Income Statement

$1,610,075,000

 

 

If you did the math correctly, you'd have calculated that between 1999 and 2000, McDonald's had an inventory turn rate of 96.1549, incredible for even a high-turn industry such as fast food. These numbers show that every 3.79 days, McDonald's goes through its entire inventory. Wendy's, on the other hand, has a turn rate of 40.073 and clears its inventory every 9.10 days.

This difference in efficiency can make a tremendous impact on the bottom line—and it did. By tying up as little capital as possible in inventory, McDonald's can use the cash on hand to open more stores, increase its marketing support, or buy back shares. It eases the strain on cash flow considerably, allowing management much more flexibility in planning the future of the business. It is a positive for long-term investors.

Final Thoughts on Balance Sheet Inventory

In most cases, investors want as little money as possible tied up in inventory. It is fine to have a lot of inventory on the balance sheet if it is being sold at a fast enough rate that there is little risk of becoming obsolete or spoiled, or there is some major competitive advantage in keeping a large stockpile. However, those usually are not the case. Great companies have excellent inventory handling systems, so they order products only when they are needed, seeking never to buy too much or too little of something.

Businesses that have too much inventory sitting on the shelves or in a warehouse are not being as productive as they could be. Had management been wiser, the money could have been kept as cash and used for something more beneficial for shareholders.