McDonald's reviews capital structure, CFO retiring

LOS ANGELES (Reuters) - McDonald's Corp. (MCD.N) on Tuesday said it would make a decision about a possible increase in its debt level this fall and announced the retirement of Chief Financial Officer Matthew Paull.

The fast-food chain, which is the world's biggest restaurant company, also reported a second-quarter net loss after taking a big charge for the sale of 1,600 Latin American restaurants to a franchisee.

Without the charge, earnings per share were up 27 percent, in line with a better-than-expected forecast the company gave last week. The results continued the strong performance McDonald's has logged in recent years as a variety of new products, extended restaurant hours and other initiatives have helped revitalize sales.

Chief Executive Jim Skinner on a conference call with analysts to discuss McDonald's quarterly results said the company was focused on ways to increase its free cash flow, which it has been using to return cash to shareholders through billions of dollars of dividends and stock buybacks. It plans to return at least $5.7 billion in 2007 and 2008.

Selling more restaurants to franchisees, which minimizes McDonald's capital investment and insures a stable royalty stream, is one way the company is doing that, Skinner said, though it is also looking into borrowing more.

"The credit markets are friendlier, especially in a business model like ours," he said, adding that McDonald's was "not wedded" to its current capital structure. "We are preparing to discuss these topics with the board and are exploring all of our options." Any such decision would be made in the next few months, Skinner said.

Paull said McDonald's would not give up its investment-grade status but "could run the company well with something lower" than its current 'A' rating, slightly below the mid-point of the investment-grade range.

McDonald's had total long-term debt on its balance sheet of $8.8 billion and total assets of $29.5 billion as of March 31.

Paull during the call announced plans to leave McDonald's to pursue a teaching career. He will likely stay with the company through the end of the year while external and internal candidates are considered as his replacement.

"This is not about me wanting a bigger job at McDonald's. ... This is not about me going to work for some other company," Paull said. "I have always dreamed of going back to a college campus to teach, and because of all that McDonald's has done for me, I can now afford to do so."

A 14-year veteran of McDonald's, Paull was named CFO in 2001 and steered the company's finances throughout its recent four-year turnaround.

McDonald's reported a second-quarter net loss of $711.7 million, or 60 cents per share, compared with a net profit of $834.1 million, or 67 cents, a year ago.

Excluding the Latin America charge, McDonald's earned 71 cents a share, in line with the better-than-expected forecast the fast-food chain gave last week and up from 56 cents posted a year earlier.

McDonald's in April said it would sell its restaurants in Latin America and the Caribbean so it could focus resources on markets where it sees the biggest opportunities for growth, such as China.

Revenue rose 12 percent to $6.01 billion, above analysts' average view of $5.90 billion, according to Reuters Estimates.

McDonald's U.S. sales have been helped by the launch of premium coffee, more 24-hour restaurants and chicken snack wraps that have brought in customers outside of normal meal times, Morningstar Inc. analyst John Owens said. But he also cautioned that competitors would come out with their own versions of these after seeing McDonald's success.

"I still think they can improve from where they are, but it will be incremental and I do believe competitors will narrow the gap," he said. Morningstar has a rating of three stars out of a possible five for McDonald's and a fair value of $49.

McDonald's shares were off 41 cents to $52.09 in Tuesday afternoon trade on the New York Stock Exchange. Before Tuesday, the stock traded at about 17.4 times analysts' average 2008 earnings estimate, compared with multiples of 25.8 and 18.7 for rivals Wendy's International Inc. (WEN.N) and Yum Brands Inc. (YUM.N), respectively.

(Additional reporting by Brad Dorfman in Chicago)