Fitch Ratings has affirmed the ratings of McDonald's Corporation (NYSE:
MCD) as follows:
--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 power.
Credit Statistics:
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 denominated.
Rating Sensitivities:
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 credit positive.
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 action.
--A prolonged period of negative SSS, margin contraction, and declines
in operating cash flow would be viewed negatively.
Contact:
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 Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
2013 Outlook: U.S. Restaurants (Intensifying Competition, Food
Inflation, and Legislation To Drive Operating and Financial Strategies)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696952
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801447
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