Fitch Affirms McDonald's IDRs at 'A/F1'; Outlook Stable
CHICAGO -- September 6, 2013
Fitch Ratings has affirmed the ratings of McDonald's Corporation (NYSE: MCD)
--Long-term Issuer Default Rating (IDR) at 'A';
--Bank credit facilities at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.
The Rating Outlook is Stable. At June 30, 2013, McDonald's had $13.4 billion
of total debt.
McDonald's ratings reflect its substantial cash flow, consistent financial
strategy, stable credit statistics, leading global market position, and proven
operating strategy. McDonald's large stream of high margin sales-based
royalties and contractual rent-based revenue is also factored into ratings.
Key Rating Drivers:
Substantial Cash Flow
McDonald's cash flow from operations (CFO) has grown at a 9% compound annual
growth rate since 2003 to $7.0 billion in 2012. CFO growth has slowed recently
due to more modest sales and operating income growth but remains substantial.
Free cash flow (FCF - defined as cash flow from operations less capital
expenditures and dividends) has averaged $1.6 billion since 2003. However, FCF
is lower than historic levels at roughly $1 billion due to elevated capital
expenditures and dividend increases. Fitch believes CFO growth can
re-accelerate in 2014, albeit at a lower than historical rate, and that FCF
will trend near current levels.
Consistent Financial Strategy
McDonald's financial strategy is to reinvest in its business, return cash to
shareholders, and maintain credit statistics appropriate for an 'A' credit
rating. Capital expenditures will approximate $3.1 billion in 2013, fairly
flat versus 2012. For the six months ended June 30, 2013, McDonald's paid $1.5
billion in dividends, up from $1.4 billion in the same period last year, but
share buybacks totaled $786 million, down from $1.7 billion in the comparable
period last year.
Strong Global Market Position
With over $88 billion of systemwide sales, 34,480 worldwide units, $27.6
billion of total revenue, and $8.6 billion of operating income in 2012,
McDonald's is the world's largest restaurant company and a widely respected
brand. The firm's geographic segments and their percentage of 2012 revenue and
operating income were: the U.S. (32% and 44%), Europe (39% and 37%), APMEA
(Asia/Pacific, Middle East, and Africa) (23% and 18%), and Other Countries and
Corporate (6% and 1%).
Significant Franchise Revenue
Franchisees and affiliates operate 81% of McDonald's units while the remaining
19% are company-operated. Revenue from franchising was roughly $9 billion or
33% of McDonald's total revenue in 2012. McDonald's owns about 45% of the land
and 70% of the buildings for its system of restaurants. Net property and
equipment had a book value of $24.3 billion at June 30, 2013.
Proven Operating Strategy
McDonald's three global priorities include optimizing its menu, modernizing
the customer experience, and broadening accessibility to its brand. Annual
global same-store sales (SSS) have only declined twice since 1997, despite
multiple economic recessions. McDonald's long-term, average annual constant
currency financial targets include 3% - 5% system sales and 6% - 7% operating
income growth. Fitch views system sales goals as achievable but believes
operating income growth could fall below target levels over the
near-to-intermediate term due to potential cost pressures.
Recent Operating Performance:
For the six months ended June 30, 2013, McDonald's revenue increased 2% to
$13.7 billion and operating income rose 1% to $4.2 billion on a constant
currency basis. Global SSS were flat with guest counts declining 1.2% and
pricing approximating 1.2%. SSS in the U.S., Europe, and APMEA 0.1%, 0.6%, and
1.9%, respectively, while comparable sales rose 6.1% in the Other Countries
and Corporate segment. Fitch believes increased emphasis on value and menu
innovation helped McDonald's remain competitive during the first half of 2013,
despite weak comparable sales. Examples of new menu items include Premium
McWraps, Blueberry Pomegranate Smoothies, the Egg White Delight, and an
expanded Quarter Pounder platform.
Global company-operated restaurant margin declined 90 bps to 17% and franchise
margin fell 50 bps to 82.3% as profitability was negatively impacted by weak
SSS. Lower selling, general, and administrative expenses partially mitigated
this pressure resulting in a modest 30 bps decline in combined operating
margin to 30.3%. McDonald's expects commodity food costs to rise 1.5% to 2.5%
in the U.S. and 2.0% to 3.0% in Europe during 2013. Fitch believes McDonald's
large scale and procurement infrastructure provide the firm significant buying
For the latest 12 month period ended June 30, 2013, total debt-to-operating
EBITDA and rent-adjusted leverage (total debt plus eight times gross rent
expense divided by EBITDA plus gross rents) were 1.3x and 2.3x, respectively.
Rent-adjusted interest coverage (EBITDAR divided by gross interest expense
plus gross rent) was 5.2x and funds from operations (FFO) fixed charge
coverage was 4.0x. Fitch expects credit metrics to remain near current levels
over the near-to-intermediate term.
Significant Liquidity, Manageable Maturities:
McDonald's liquidity at June 30, 2013, totaled $3.8 billion and consisted of
$2.3 billion of cash and full availability under the firm's undrawn $1.5
billion committed revolver, which expires Nov. 1, 2016. Maturities of
long-term debt as of June 30, 2013, approximated $33 million in 2013, $554
million in 2014, and $1.1 billion in 2015. About 65% of the firm's $13.4
billion of debt at June 30, 2013 was U.S. denominated and 35% was foreign
Future developments that may, individually or collectively, lead to a positive
rating action include:
--Maintaining total debt-to-operating EBITDA and rent-adjusted leverage near
1.0x and 2.0x, respectively, margin stability, and high single-digit FCF
margin to sales could result in a positive rating action.
--Sustainably strong SSS and operating income growth concurrent with a more
conservative stance towards dividends and share repurchases would also be a
Future developments that may, individually or collectively, lead to a negative
rating action include:
--Total debt-to-operating EBITDA and rent-adjusted leverage over 1.5x and
2.5x, respectively, and materially lower FCF could lead to a negative rating
--A prolonged period of negative SSS, margin contraction, and declines in
operating cash flow would be viewed negatively.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'2013 Outlook: U.S. Restaurants - Intensifying Competition, Food Inflation,
and Legislation to Drive Operating and Financial Strategies' (Dec. 19, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
2013 Outlook: U.S. Restaurants (Intensifying Competition, Food Inflation, and
Legislation To Drive Operating and Financial Strategies)
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