By Tonya Garcia
McDonald’s Corp. announced its decision to exit its business in Russia after more than three decades due to that country’s attack on Ukraine, a move that complicates the burger giant’s growth plans, according to GlobalData.
“Before the invasion, Russia – together with Ukraine – generated around 9% of McDonald’s revenue and accounted for 3% of operating income. While McDonald’s can take such a hit in its stride, it will leave a hole in its growth plans that is not easily filled in the near-term,” wrote Neil Saunders, managing director at GlobalData.
McDonald’s is looking for a local Russian buyer — and the name, logo, branding and menu will be removed from the sold locations. It expects to take a primarily non-cash charge of $1.2 billion to $1.4 billion.
“The fact that McDonald’s owns most of its restaurants in Russia means there is an asset rich business to sell. However, given the circumstances of the sale, the financial challenges faced by potential Russian buyers, and the fact that McDonald’s will not license its brand name or identity, it is unlikely the sale price will be anywhere near the pre-invasion book value of the business,” GlobalData said.
McDonald’s /zigman2/quotes/203508018/composite MCD +1.51% news comes after many companies announced their departure from the country, or plans to otherwise cease business relations or investment there. McDonald’s previously announced the closure of its 850 locations in the region. The company says it will continue to pay its workers until a deal is sealed.
Chief Executive Chris Kempczinski said in Monday’s letter that McDonald’s has become convinced of its inability to do business there after asking a set of questions, including “Is our presence in the market brand-enhancing to our global operations? And does it make good business sense?”
“Unfortunately, the answer to each of these questions is currently no — and I don’t see that changing for the foreseeable future,” Kempczinski said.
McDonald’s stock is down 10% for the year to date while the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.15% has slumped 10.1% for the period.
“While MCD had previously stated it anticipated a decision would be communicated by the end of the 2Q, we think today’s announcement removes a potential overhang for the stock, given the ongoing costs related to its operations in Russia and Ukraine (~$55 million/ month in employee pay, lease and supply chain costs, etc.),” wrote RBC Capital Markets in a note.
“Looking ahead, the sale of MCD’s Russia operations will effectively shift McDonald’s franchised mix to ~95%, from ~93% prior, a benefit to margins in a challenging cost environment, and ultimately the stock, in our view.”
RBC rates McDonald’s stock outperform with a $295 price target.