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Skinner’s Toughest Challenge: His Succession

Despite the CEO's stunning success at McDonald's, it might be time to change 'Plan to Win'

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Dow LeaderboardCEO Jim Skinner has done so much for McDonald’s (NYSE:MCD) shareholders since he took over in 2004 that they should shout “I’m lovin’ it” in unison at the company’s next shareholder meeting May 17. After all, the stock has quadrupled during his tenure, compared to a 24% return for the Dow during the same time frame.

But MCD, the Dow’s most dazzling performer in 2011, now faces looming challenges that Skinner’s stay-the-course management style might be ill-equipped to overcome. Skinner, who turns 68 this year and helped the company cope with the loss of two CEOs in just six months, might find his greatest legacy to be how well he has prepared his eventual successor to lead the global restaurant chain.

And when applied to McDonald’s, the word “chain” translates into “behemoth.” Skinner — a low-key, former Navy man whose first McDonald’s job was flipping burgers at the age of 16 — runs a global company of 33,000 restaurants (80% franchised) with 1.7 million employees in 119 countries. The company’s stock rose a whopping 31% in 2011, to an all-time high of over $102 — while increasing its dividend by 15%, which translates into a current yield of 2.7%.

But past performance is no guarantee of future results, and challenges loom large for McDonald’s. The company last Wednesday reported 7.5% global same-store sales growth in February. While most retailers would kill for those numbers, it was lower than the expected 7.7% to 8.2%. The biggest black eye: operations in Europe, where same-store sales grew only 4% instead of the expected 6.6%. Investors punished MCD’s miss by driving share prices down 3%.

Skinner’s own compensation took a hit to the tune of $1.2 million last year, as the CEO’s annual performance-based bonus was dialed back to $3.3 million.

“The global economy remains challenging with the recovery that is predicted to be slow and prolonged,” Skinner said in MCD’s fourth-quarter earnings conference call in late January. “Our industry still faces significant headwinds, including flat to slow growth, low consumer confidence and volatile commodity pressures.”

Still, Skinner remains committed to the “Plan to Win,” the back-to-basics approach developed by Skinner and two former CEOs — Jim Cantalupo and Charlie Bell. That approach scaled back expansion of new stores in favor of enhancing the value proposition at existing restaurants. The plan — which called for improvements in service, cleanliness, marketing and food taste — reversed the company’s flagging fortunes in the first year.

When Cantalupo left retirement to take over the CEO job from Jack Greenberg in 2003, MCD had reported the first loss in its history as a public company and same-store sales were falling through the cellar. So was its share price, slipping from around $48 in 1999 to under $12 in March 2003. Cantalupo righted the ship in record time.

But hours before his scheduled victory lap at the company’s 2004 shareholder meeting, Cantalupo suffered a fatal heart attack, leaving his second-in-command Bell in charge and elevating Skinner to Bell’s old job as president and COO. But within six months, Bell would leave the company to fight what would become a losing battle with colorectal cancer.

When the then 60-year-old Skinner took over as CEO, most observers thought he was simply a placeholder until the company’s CEOs-in-waiting Michael Roberts and Ralph Alvarez were ready to step up.

Article printed from InvestorPlace Media,

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