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New CEO Kempczinski Well-Suited to Lead McDonald's

Easterbrook's departure is a surprise, but there is no change to our fair value estimate for the wide-moat firm, and we see shares as modestly undervalued.

The sudden departure of McDonald's MCD CEO Steve Easterbrook is a surprise, but we ultimately believe newly appointed CEO Chris Kempczinski is the best positioned executive to lead McDonald's in future. Easterbrook, who left McDonald's "following the board's determination that he violated company policy and demonstrated poor judgment involving a recent consensual relationship with an employee," had been instrumental in the company's turnaround efforts since 2015. This includes a successful global segment reorganization, refranchising more than 4,000 locations, and eliminating $500 million in annual SG&A expenses. During that period, McDonald's also undertook several "velocity growth accelerators," including (1) an experience of the future layout, which features a combination of ordering flexibility, customer experience, and a more streamlined menu; (2) mobile ordering and payments; and (3) delivery alternatives.

When Easterbrook was appointed CEO in January 2015, he was also tasked with adding outside perspectives that would help to develop new growth strategies that capitalized on McDonald's key strengths: its brand, its franchisees, and its scale (also the key components behind our wide-moat rating). Kempczinski was one of the key hires during this time, joining McDonald's in September 2015 as executive vice-president of strategy, business development & innovation following leadership positions at Kraft and Pepsi. Kempczinski had been actively involved with the velocity initiatives--including digital and delivery--and worked with franchisees to adopt these platforms since becoming the head of McDonald's United States in January 2017. We also believe Kempczinski's focus on menu innovation, restaurant operations, and international expertise (from his time at Kraft) make him a strong CEO candidate.

There is no change to our $215 fair value estimate, wide-moat rating, or Standard stewardship rating following the CEO transition, and see shares as modestly undervalued.

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About the Author

RJ Hottovy

Sector Strategist
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R.J. Hottovy, CFA, is a consumer strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He is responsible for consumer discretionary and staples research. He has covered the consumer sector as an analyst and director of global consumer equity research for Morningstar since joining the company in 2008, and specializes in a broad range of consumer categories including restaurants, footwear and apparel retailers, consumer electronics retailers, fitness clubs, home improvement and furnishing retailers, and consumer product manufacturers.

Before joining Morningstar, Hottovy was a director and senior stock analyst for Next Generation Equity and an analyst for William Blair & Co., specializing in a wide range of retail and consumer product companies. He also spent two years at Deutsche Bank, covering waste management, water utilities, and equipment rental stocks.

Hottovy holds a bachelor’s degree in finance and a second degree in computer applications from the University of Notre Dame, where he graduated magna cum laude. He also holds the Chartered Financial Analyst® designation and is a member of the CFA Institute and the CFA Society of Chicago.

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