McDonald's Corp.’s MCD CEO Steve Easterbrook recently announced the initial steps of the company's turnaround plan, which involves the restructuring of its worldwide operation and certain other financial updates.
The company will establish new market segments to enhance its value and efficiency and drive faster and more customer-led decisions. The company will restructure its business, beginning Jul 1, 2015, into four new segments that will combine markets with similar needs, challenges and growth opportunities. The restricting plan will be supported by more streamlined management teams.
These new segments are: U.S. – the company's largest segment; International Lead Markets – mature markets which include Australia, Canada, France, Germany and the U.K.; High-Growth Markets – markets with high restaurant expansion and franchising potential including China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands; and Foundational Markets – the remaining markets in McDonald's’ system, each of which has the potential to operate under a substantially franchised model. The company also announced certain management changes.
McDonald's also plans to further increase franchising, lower G&A expenses and reward shareholders more. The company expects to refranchise 3,500 restaurants by 2018-end, thus accelerating the global franchised percentage from the current 81% to nearly 90%. This marks a significant step forward from its prior plan to refranchise at least 1,500 restaurants by 2016. Management believes a heavily-franchised business model will generate more stable and predictable revenue and cash flow streams and require a less resource-intensive support structure.
The company expects almost $300 million in net annual G&A cost savings, with most of the savings being realized by the end of 2017, related with the organizational restructuring, refranchising strategy and cost-cutting measures. McDonald’s also expects to return $8 to $9 billion to shareholders in 2015 and reach the higher end of its 3-year goal of returning $18 to $20 billion by 2016-end.
The turnaround plan comes in the wake of the declining comps faced by the company over the past few quarters in most of its key operating regions due to some issues. In fact, of late, the company has been trying to counter these issues by introducing variations of items already on its menu instead of introducing new ones. Further, we are encouraged by the company’s latest “Create Your Taste” program that allows customers to create burgers of their own choice. We believe that such programs will help the quick service restaurant chain to cater to customers looking to customize their menu.
Another progressive step for the burger chain has come from its shift to another menu item – chicken. McDonald’s announced that it plans to stop selling chicken raised with antibiotics over the next two years. Also, the company is reportedly planning to add kale to its menu this year keeping in mind its health conscious consumers.
McDonald’s presently has a Zacks Rank #4 (Sell). Some better-ranked stocks in the same industry include Ruby Tuesday, Inc. RT, Darden Restaurants, Inc. DRI and BJ's Restaurants, Inc. BJRI. All these stocks sport a Zacks Rank #1 (Strong Buy).
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