May 6, 2015

Plan Hurts McDonald's Credit Rating

Turnaround plan hurts McDonald's credit rating - NRN's take
.

2 comments:

Anonymous said...

This will be just one of several costs to the system resulting from consistently poor management. Even so pray for a tough recession in the near future as it will slam our competitors harder than it will MCD. It is sickening to realize that all of these problems are self inflicted. None of this was necessary!!!

Anonymous said...

McDonald's reported an operating cash flow of $6.7 billion for FY14. Considering the weak sales momentum in 1Q15 coupled with the point that sales are likely to remain depressed through FY15, expect FY15 OCF to be lower than FY14. Therefore, the $8 to $9 billion shareholder return program for FY15 will be partially debt funded. Further, McDonald's also has a capital expenditure plan of $2 billion for FY15 that will be debt funded. Therefore, the company's leverage will increase in FY15 without having any meaningful impact on sales or EPS growth.
Reaching the top end of the target for shareholder returns in FY16 would imply that leverage would increase further in FY16. The primary concern is that revenue turnaround is unlikely anytime soon. This would mean that the company's credit metrics would continue to worsen over the next two years.

S&P has already downgraded McDonald's from A to A- citing the stress due to higher leverage in FY15 and in FY16. Therefore, McDonald's will be increasing its leverage without the same having any meaningful business impact. In my view, this is not the best thing to do at a time when the core business needs revival and McDonald's is likely to increase its advertising cost in the coming quarters (resulting in operating margin pressure).

None of the initial turnaround plan focus on the menu, which, in my opinion, can be the single biggest game changer.

The next part of the turnaround MUST be focused on the menu offerings. Even with that, the impact on consumers has to be assessed from a sales turnaround point of view.