What New Leadership at McDonald's Means for Shareholders
Mar 23rd 2012 9:50AM
Updated Mar 23rd 2012 9:52AM
Fast-food chain McDonald's (NYS: MCD) will say goodbye to Chief Executive Officer Jim Skinner on June 30 after nearly eight years at the helm. McDonald's Chief Operating Officer Don Thompson, who will be stepping in to run the company, has big shoes to fill. Let's find out how the world's largest restaurant chain plans to continue the momentum without Skinner.
Skinner joined McDonald's in 1971 as a restaurant manager in training. After years of climbing the company's leadership ladder, Skinner became CEO in 2004 during a time when the company was expanding too quickly for its own good. He helped turn operations around with initiatives like the "Plan to Win" strategy, which delayed new store openings and gave more attention to existing McDonald's locations. It's been enormously successful thus far.
Franchisees now own more than 80% of McDonald's restaurants worldwide. That's good for shareholders because the fast-food giant collects rent payments and service fees from franchisees -- growing Mickey D's free cash flow, without the burden of operating the stores themselves. But competitors have taken notice. Rival Dunkin Brands (NAS: DNKN) went public again in July of last year with nearly 100% of its stores franchised. Similar to McDonald's, royalties from franchises make up the majority of Dunkin's revenue. This structure allows McDonald's and Dunkin to grow profits without having to invest too much of their own capital.
Skinner's vision for a more franchise-rich model has no doubt contributed to McDonald's resurgence as a leading American brand. Shares of McDonald's have nearly quadrupled since he took the helm almost eight years ago, which leaves many investors wondering whether the company's growth spurt will end when he's gone.
McDonald's shareholders are in good hands with the company's current president, Thompson, who will succeed Skinner as CEO later this year. With 22 years of experience under the Golden Arches, Thompson is no stranger to the inner workings of McDonald's success. He led the company's push into specialty coffees by introducing McCafe beverages and smoothies. The new drink segment was an instant success for the company, pitting the world's largest fast-food chain against the world's largest coffee retailer, Starbucks (NAS: SBUX) .
McDonald's has a lot to gain here because premium coffees pack higher profit margins than burgers and fries, not to mention, fresh menu items help attract new customers to its restaurants. On the other hand, Starbucks drinkers are devastatingly loyal to the brand, which makes it difficult for competitors like McDonald's and others to eat away at their profits. To cover its bases, Starbucks introduced a new super-premium light roast dubbed "Blonde" that it hopes will have a wider appeal.
During his time as president and later operating chief, Thompson fueled various initiatives at McDonald's. From expanding the menu to include fresh offerings like gourmet coffees and oatmeal to renovating thousands of locations around the world, Thompson has been a major part of the company's growth. I suspect he'll continue to shake things up (for the better) in his new role.
What the future holds
Skinner will certainly be missed. But, as most great leaders do, he's laid the groundwork for many more years of success -- and what better guy to take his place than a 22-year veteran of happy meals. Looking ahead, investments in store remodeling and menu innovation should continue to drive McDonald's strong sales momentum. I still see lots of growth opportunities for McDonald's through its franchise system.
Shares currently trade around $96 with a P/E of 18 and healthy margins. That's not bad when you consider McDonald's main competitor Yum! Brands (NYS: YUM) is priced at more than 25 times earnings on weaker margins. Not only do I think McDonald's will outperform Yum! in 2012, but it also boasts a more attractive dividend yield of 2.8% to Yum!'s 1.6% yield. That's why I'm giving McDonald's a three-year outperform rating on my profile in Motley Fool CAPS.
Skinner has helped shape McDonald's into the global brand it is today, and the strength of that framework will carry the chain forward. As long as the company keeps finding ways to reinvent itself, I expect McDonald's to continue this successful run under new leadership from Thompson. It's this track record that landed McDonald's in our report: "3 American Companies Set to Dominate the World." It won't be around forever so click here to discover the other two stocks our analysts love for international growth.
At the time this article was published Foolish contributor Tamara Rutter does not own shares of any companies mentioned in this column. Follow her on Twitter, where she uses the handle: @TamaraRutter, for more Foolish insights and updates on your favorite stocks. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of McDonald's, Starbucks, and Yum! Brands. Motley Fool newsletter services have recommended writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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