In a release issued yesterday, McDonald’s Corporation (NYSE: MCD) announced a new direction and changes to its spending plans.
While maintaining his stance that McDonald’s will grow, Chairman and CEO Jim Cantalupo redefined what growth will look like. “Growth comes from being better, not just expanding to have more restaurants. The new McDonald's is focused on building sales at existing restaurants rather than on adding new restaurants,” Cantalupo said.
Much to the satisfaction of investment analysts, the company said it would cut its 2003 capital expenditure budget by $700 million to $1.2 billion. Some $490 million of the capex budget will go toward refurbishing about 1,000 existing stores. The company plans to open 960 locations worldwide and close around 600.
Cash freed up from the cut will be used to strengthen the balance sheet by paying down approximately $300-700 million in debt, increasing shareholder dividends, and repurchasing shares.
In addition, the company lowered its systemwide sales growth target beyond 2005 to between 3% and 5%. Operating income growth is targeted at 6-7%. "McDonald's will pursue realistic growth targets,” Cantalupo said.
The announced changes pleased analysts and investors alike as McDonald’s shares rose 8.59% to $15.80. Trading was very heavy at over 20 million shares on an average volume of less than 7 million.
Lower capital spending, fewer store openings, and increased share repurchases have all been topics of concern for analysts of late. In a note to investors, Mark Kalinowski of Solomon Smith Barney said, "We believe such a move shows a willingness on the part of management to treat McDonald's more like a cash cow, which we welcome."
Key to putting the gold back on the arches will be McDonald’s ability to bring customers back into the restaurants. President and COO Charlie Bell told analysts at a conference yesterday that McDonald’s would refocus on families with children and young adults as a target market. Bell said the company will monitor five drivers of service with three year goals to measure success.
These changes in business strategy come on the heels of reported improvements to menu items announced to franchisees last week. Included in the menu changes will be a return to the original Big Mac special sauce (though no one knew it was ever changed) and an improvement in sandwich buns. Changes to the controversial “Made for You” kitchen setup appear also to be in the works.
Rumors of selling off part or all of its partner brands – Chipotle, Boston Market, Donatos Pizza – may have some validity as well. When asked at the conference, analysts were told the Partner Brands were under review but “there’s been no decision made.”
After several quarters of struggling sales and the posting of its first loss ever in the fourth quarter of 2002, the focus on the core business is a welcome sign. Cantalupo seems to understand. “We will grow by becoming better ... not just bigger."
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