McDonald's Turnaround Plan Leaves Investors Hungry for More Details

NEW YORK (The Deal) -- With great fanfare -- including a 20-minute video presentation starring its CEO -- McDonald's (MCD) on Monday unveiled its widely anticipated turnaround plan.

The result was about as satisfying as a Big Mac, only without the two all-beef patties, special sauce, lettuce, cheese, pickles or onions. Investors sent the fast-food giant's stock down about 1.7% to close at $96.13. The company's shares continued to trend downward Tuesday morning, as the disappointment over the revamp blueprint set in and two ratings agencies raised red flags about the effects of the company's plans on its debt burden.

The stock closed Tuesday at $96.13, unchanged.

The plan's essential ingredients included cutting net costs by $300 million a year, re-franchising 3,500 of the 6,700 restaurants McDonald's directly owns and reorganizing the company into four divisions. To shareholders and industry watchers who were expecting a comprehensive restructuring of the business, including improvements to McDonald's much-maligned menu, the proposals had all the appeal of a stale sesame-seed bun.

The centerpiece is the reorganization. The first of the four divisions would be comprised of only the U.S., while the second would include the established markets of Australia, Canada, France, Germany and the U.K. A third division would constitute high-growth markets such as China, Italy, Poland, Russia, South Korea, Spain, Switzerland and the Netherlands. A fourth division would include all of McDonald's other markets and would be 100% franchised.

The company also plans to lever up to return between $8 billion and $9 billion to shareholders. This suggestion prompted Standard & Poor's Ratings Services to downgrade the company and Moody's Investors Service to put it on review.

Yes, McDonald's executives did pay lip service to the idea of offering menu options that cater to consumers' changing tastes and providing consumers with more ways to customize their orders. And company officials intend to tell the world that McDonald's already offers high-quality ingredients and more "value." But beyond these broad strokes, there weren't many details.

On a conference call with analysts, McDonald's executives said that it was too early to say how operating income will be affected by the re-franchising efforts and that they continue to study potential options for its real estate such as a real estate investment trust.

While re-franchising restaurants in established markets can generate almost $1 million in proceeds per location, that figure is less in emerging markets, and according to McDonald's, that is where the focus will be. When it does re-franchise locations, revenue and earnings will likely take a hit, even while operating margins increase. That means extra debt becomes even more onerous when cash flow is reduced.

But such tinkering, which is giving the financial ratings agencies pause, will also not return growth to McDonald's. And while the Oak Brook, Ill.-based company is testing a number of ideas for its menu, including new introductions such as a sirloin burger and antibiotic-free chicken, CEO Steve Easterbrook offered no over-arching vision. McDonald's could at least have used the occasion to reach a broader audience of consumers and explain a new, more flavorful approach to its menu. But officials offered none of that -- or even gave any indication about whether some menu items might be cut.

Forget the video and the conference call. Easterbrook and his minions could have made their "big" announcement in a three-paragraph news release.

Perhaps McDonald's officials have a bigger, more far-reaching plan to stem the loss of customers to newer, trendier eateries. Maybe Easterbrook has devised a way to make better breakfasts and burgers. If so, he would have been better off keeping it in the oven until it is completely baked. His performance this week will only feed a growing perception that McDonald's management can't respond to the threats from high-flying rivals.

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