McDonald's Revamps Strategy on International Brands

The changes are the latest in its successful revitalization plan.
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Updated from 11:52 a.m. EST

McDonald's

(MCD) - Get Report

latest step in its revitalization plan creates a leaner, more focused company, and one that analysts are so far positive on.

On Monday, the company said that it will sell or discontinue several of its brands that operate outside of the U.S. to focus on their already profitable U.S. operations. But McDonald's shares, which have more than doubled since hitting a 52-week low of $12.12 in March, still declined slightly in Monday's session.

McDonald's said it will develop its U.S.-based Boston Market and Chipotle brands, but discontinue Boston Market operations in Canada and Australia. As a result, the company sees an after-tax charge of 23 cents to 28 cents a share in the fourth quarter.

Both the Chipolte and Boston Market brands "have the critical mass to operate independently of brand McDonald's, operate profitably and are positioned in the quick-casual segment," wrote SG Cowen Securities analyst Paul Westra in a research note. "In retaining these investments, McDonald's retains its quick-casual presence, a market we estimate to have a $50 billion potential."

Westra noted that he was pleasantly surprised that the company chose to keep both companies, saying that McDonald's had previously indicated it might divest all non-McDonald's branded restaurants. (SG Cowen does investment banking for McDonald's.)

John Ivankoe, an analyst at J.P. Morgan, expects McDonald's to focus mostly on Chipotle "given strong consumer acceptance of brand, attractive unit economics, and significant unit growth potential." (J.P. Morgan also does investment banking for McDonald's.)

"We will concentrate our efforts primarily on Chipotle and Boston Market in the United States, concepts that have potential for long-term growth and benefit to McDonald's," said Chief Executive Jim Cantalupo in a statement. "These two brands are sizeable companies that can operate autonomously. We believe this new focus and discipline makes the most sense for our company, our shareholders and our ongoing business momentum."

Westra sees the divestitures having "little to no earnings effect" in the near term or in the long term because both Chipolte and Boston Market are relatively small in comparison with the McDonald's behemoth. Thus, it is not surprising that shares of the company were lately down 21 cents, or 0.8%, at $25.57.

Stevens Monte, an analyst at Sky Capital LLC, said the stock's relative inaction on the news reflects investors' prior awareness that McDonald's would eventually disclose its plans for its four brands before the end of the year.

"What they announced today was no surprise," said Monte. "The only surprise was what exactly they were going to do: spin off the entire package, sell them all, close them, or divest a part or keep a part, which is what they did."

Overall, Monte sees keeping the Chipotle and Boston Market restaurants in the U.S. as a good thing. "If the current management team applies the same strategies, and focuses on the two brands as they did on the core McDonald's brand as successfully and raptly then I believe it will work to the benefit of all shareholders." (Monte holds no shares of McDonald's and his company does not do investment banking.)

Analysts are expecting the company to earn 35 cents a share in its fourth quarter, from 25 cents a share in the prior year. In the third quarter, the company reported record earnings of 43 cents a share, with net income of $547 million, on sales of $5.58 billion.

The company's restructuring plan announced Monday also includes the sale of Donatos Pizzeria back to its founder. McDonald's will also close the pizza chain's operations in Germany. The fast food giant has also entered into a letter of intent to exit its domestic joint venture with Fazoli's. The company, however, will retain its minority investment in Pret A Manger, but said McDonald's Japan will close its Pret units.

The company has been restructuring its operation since April in an effort to attract new customers, build brand loyalty and increase profits, by cutting debt and slowing expansion. Most recently, McDonald's announced sweeping changes to its international management team.

That restructuring has already delivered impressive results. After a yearlong slide, same-store sales have risen eight months in a row, including double-digit growth the past three months. U.S. sales in October and November hit record highs for those months.