McDonald’s fix-up falls flat
Easterbrook’s plans lack radical solutions: analysts
NEW YORK • McDonald’s Corp.’ s turnaround plan presented Monday offered many of the corporate fix-up standards: a leadership reorganization, cost cuts and plans to return cash to shareholders. Yet investors were hoping for more.
Chief executive Steve Easterbrook is restructuring the restaurant chain, saying the key to snapping its sales slump is improving operations.
The company also will shift more restaurants to independent owners, cut costs and return cash to shareholders, Easterbrook said Monday.
McDonald’s is trying to stem an exodus of customers who are seeking higher-quality food at chains like Chipotle or cheaper fare at traditional rivals such as Burger King and Wendy’s.
While analysts said the moves Easter brook an-- nounced were steps in the right direction, his presentation lacked more radical changes like splitting off McDonald’s land holdings. Others found the plan lacking specific solutions to the chain’s most pressing problems, such as its bloated menu, slow service and the perception that its food is low quality.
The shares fell as much as 1.4 per cent, and the company’s debt rating was cut by Standard & Poor’s.
“The market expected more,” said Asit Sharma, an analyst at the Motley Fool.
“Easterbrook set the expectation that he would present a novel solution to McDonald’s woes” and instead delivered changes that “could have been announced on a quarterly earnings call,” Sharma said.
To snap the sales malaise that got his predecessor ousted after less than three years as CEO, Easterbrook is revamping the company’s leadership into four segments of similar markets. One will focus on the U.S., another will oversee countries like Canada and France, where McDonald’s is well established. Yet another will manage markets such as China and Poland, where the chain is growing more quickly. The final unit will oversee the other 100 countries where McDonald’s operates, a segment Easterbrook is calling Foundational Markets.
Easterbrook, a company veteran, took over McDonald’s in March after the company’s worst sales slump in more than a decade forced his predecessor from the job.
“Our turnaround will be grounded in operations excellence and running great restaurants,” Easterbrook said in a video presentation.
Investors, though, weren’t sold that the plans presented Monday will be enough to revive the company’s prospects. McDonald’s shares closed at US$96.13 in New York, down $1.67 or 1.71 per cent.
Investors may have been looking for an update on how much debt the company is willing to take on as it returns cash to shareholders, said Will Slabaugh, an analyst at Stephens Inc. “That was something that was missing,” he said. “They haven’t touched on that quite yet.”
Investors may also have hoped McDonald’s would have followed the lead of its main U.S. rival, Burger King, and gone much further in refranchising. That chain, now owned by Restaurant Brands International Inc., is more than 99 per cent franchised worldwide.
With some extra profit rolling in, McDonald’s plans to return more cash to shareholders via dividends and stock buybacks. The company said it will deliver as much as US$9 billion to investors this year and reach the top end of its three-year target of returning as much as US$20 billion by the end of next year.
The company plans to have 90 per cent of its locations franchised globally by 2018, up from 81 per cent today.
The reorganization also will entail cutting $300 million in annual general and administrative costs by the end of 2017.
The assumption that much of the cash flow benefits from refranchising and cost cuts would be funnelled back to shareholders prompted S&P to cut McDonald’s credit rating one level to A-, the seventh-highest investmentgrade level, with a stable outlook.
The other disappointment for McDonald’s watchers was a lack of detail on the operational changes the company is planning to make. About the only specific that McDonald’s announced was that it is partnering with Postmates to offer delivery in New York City. The company said 88 restaurants in Queens, Manhattan and Brooklyn are participating in the test, which began Monday and includes McDonald’s full menu, except for ice cream cones.