News that McDonald’s (NYSE:MCD) had fired CEO Steve Easterbrook dropped the stock price 5%, to $188, before it rebounded in overnight trading into Nov. 5. The cost of his firing to McDonald’s shareholders is thus about $6 billion. How long will it take the company to get that back?
Easterbrook was fired over the weekend for a consensual relationship with a subordinate, the same thing that ended the tenure of former Intel (NASDAQ:INTC) CEO Brian Krzanich last year.
But unlike Krzanich, Easterbrook was a superstar. He had nearly doubled the price of the stock during his tenure, which began in 2015. He had earned as much as $21.8 million in 2017. Easterbrook left with a severance package of $675,000 and will keep stock awards worth over $37 million.
The Easterbrook Legend
Easterbrook was replaced by Chris Kempczinski, who previously headed the company’s U.S. division. His salary was said to be $1.3 billion, with potential bonuses equal to 170% of his salary. Easterbrook resigned from Walmart’s (NYSE:WMT) board and will be unable to join another fast food operator for at least two years. In the wake of that news, Chief People Officer David Fairhurst also announced his immediate departure from McDonald’s.
In nearly five years at the helm, Easterbrook, who was born outside London and rose through the company’s United Kingdom operations, had transformed McDonald’s. He replaced Don Thompson, who was let go after three years for a more traditional reason, bad financial results.
Easterbrook served breakfast all day, redesigned the restaurants and invested heavily in technology. He moved the headquarters from suburban Oak Brook to the West Loop area of Chicago. There, he served food from the restaurant’s global operations and eventually brought some items into U.S. restaurants for a limited time.
The former CEO also re-franchised restaurants to corporate partners in large lots. This had the effect of lowering revenue but increasing margins. McDonald’s earned $4.5 billion on revenue of $25.4 billion in 2015, his first year there. It earned $5.8 billion on revenue of $20.9 billion over the last year.
Kempczinski’s Way
Kempczinski must now go beyond the legend. Kempczinski is 51, a native of Cincinnati and has a business degree from Harvard. He is known as “Chris K” around the office.
Kempczinski joined the company after Easterbrook was in place, in September 2015, as part of the global strategy team. He had previously been at Proctor & Gamble (NYSE:PG), PepsiCo (NASDAQ:PEP) and Kraft International, now Kraft Heinz (NASDAQ:KHC).
Kempczinski’s first task will be improving relations with franchisees who have borne the costs of Easterbrook’s makeovers. Restaurant owners recently begun pushing back against the changes and Easterbrook conceded. McDonald’s delayed the rollout of home delivery changes and new, in-store order kiosks by two years.
In a memo to franchisees in July, Kempczinski said the restaurants had problems at breakfast and between meals, especially with its McCafe service, which competes with Starbucks (NASDAQ:SBUX).
McDonald’s is paying half the cost of remodeling stores with new counters, furniture and charging stations in dining areas. Easterbrook also expanded the menu, leading to slower drive-thru service. That’s another thing Kempczinski must address.
The Bottom Line on McDonald’s Stock
Easterbrook’s firing shocked the business world. While most analysts are saying the move was necessary, a minority claims the #MeToo movement kept Easterbrook from pursuing a “normal” and consensual relationship.
Kempczinski must now fix relationships Easterbrook broke, both at McDonald’s headquarters and with franchisees, without losing financial momentum in a slowing economy. McDonald’s had traded as high as $221 per share under Easterbrook, and he left with the trailing price-to-earnings ratio on McDonald’s stock near 25.
That might be a lot to ask. But if you want to bet on Chris K, you can get a dividend yielding over 2.5% if you act now.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time . available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
