McDonalds 2008 Annual Report Download - page 25

fund capital expenditures and debt repayments as well as return
cash to shareholders.
In 2008, capital expenditures of $2.1 billion were primarily
used to open 995 restaurants (590 net, after 405 closings) and
reimage 1,450 locations. In addition, we believe strongly in return-
ing cash to shareholders via dividends and share repurchases. In
2008, we returned $5.8 billion to shareholders, consisting of
$1.8 billion in dividends and $4.0 billion in share repurchases. This
brings total cash returned to $11.5 billion under our 2007-2009
$15 billion to $17 billion target. We are confident we will achieve
this cash return target given the ongoing strength and stability of
cash from operations and our continued evolution toward a more
heavily franchised, less capital-intensive business model.
We believe locally-owned and operated restaurants are at the
core of our competitive advantage, making us not just a global
brand but also a locally relevant one. In addition, an optimized mix
of franchised and Company-operated restaurants helps to max-
imize brand performance and further enhance the reliability of our
cash flow and returns. To that end, in August 2007, the Company
completed the sale of its businesses in Brazil, Argentina, Mexico,
Puerto Rico, Venezuela and 13 other countries in Latin America
and the Caribbean, which totaled 1,571 restaurants, to a devel-
opmental licensee organization. Under the new ownership
structure, the Company receives royalties in these markets instead
of a combination of Company-operated sales and franchised rents
and royalties.
In addition, in 2007 we set a three-year target to refranchise
1,000 to 1,500 existing Company-operated restaurants between
2008 and 2010, primarily in our major markets. In 2008, we
refranchised about 675 restaurants, increasing the percent of
franchised restaurants worldwide to 80% from 78% at year-end
2007. This transition to a greater percentage of franchised restau-
rants is expected to affect consolidated financial statements as
follows:
• A negative impact on consolidated revenues as Company-
operated sales shift to franchised sales where we receive rent
and/or royalties, along with initial fees.
• A decrease in Company-operated margin dollars and an
increase in franchised margin dollars, while margin percentages
will vary based on sales and cost structures of refranchised res-
taurants.
• Fluctuations in Other Operating (Income) Expense due to gains
and/or losses resulting from sales of restaurants.
• An increase in combined operating margin percent.
• An increase in return on average assets due primarily to a
decrease in average asset balances.
Highlights from the year included:
• Comparable sales grew 6.9% and guest counts rose 3.1%, build-
ing on 2007 increases of 6.8% and 3.8%, respectively.
• Systemwide sales increased 11% (9% in constant currencies).
• Company-operated margins improved to 17.6% and franchised
margins improved to 82.3%.
• Net income per share from continuing operations was $3.76, an
increase of 16% after adjusting for the impact of the 2007 Latin
America transaction.
• Cash provided by operations totaled $5.9 billion and capital
expenditures totaled $2.1 billion.
• Returned $5.8 billion to shareholders through shares
repurchased and dividends paid, including a 33% increase in the
quarterly cash dividend to $0.50 per share for the fourth quarter
– bringing our current annual dividend rate to $2.00 per share.
• One-year ROIIC was 38.9% and three-year ROIIC was 37.5%
for 2008.
Outlook for 2009
We will continue to drive success in 2009 and beyond by remain-
ing focused on being better, not just bigger. We will do so by
further enhancing our understanding of consumers’ needs and
wants; facilitating greater sharing and adoption of best practices
and new ideas worldwide; and leveraging a strategic approach to
implementing initiatives to drive the best bottom-line impact.
Despite challenging economic conditions, the McDonald’s
System is energized by our current worldwide momentum. We will
continue to build on our strength in five key areas: maintaining the
balance between price and value; maximizing the benefit of avail-
able capital by improving the relevance and contemporary feel of
our existing restaurants; leveraging the equity and unique tastes of
core menu favorites like the Big Mac, the Quarter Pounder with
Cheese and our world-famous French Fries; continuing our finan-
cial discipline and evaluation of success measures to ensure these
measures are driving actions that positively impact our restaurants;
and furthering operations excellence by focusing on improved
execution. As we do so, we are confident we can meet or exceed
the long-term constant currency financial targets previously dis-
cussed.
In the U.S., our 2009 focus is to continue to build relevance
and loyalty by staying connected to customers’ needs for menu
variety and beverage choice, everyday affordability and con-
venience. Our initiatives will include reminding customers of the
enduring appeal of menu classics such as the Big Mac and
encouraging trial of new sandwich and beverage options including
specialty coffees. Also in 2009, we will continue to offer value
across our menu from the Dollar Menu to our premium products,
as well as our classic menu favorites and mid-tier offerings such as
our Double Cheeseburger and Snack Wraps. These initiatives
combined with the convenience of our locations, optimized drive-
thru service, cashless transactions and longer operating hours will
reinforce McDonald’s position as our customers’ preferred place
and way to eat.
Our priorities in Europe remain upgrading the customer and
employee experience, enhancing local relevance and building
brand transparency. In 2009, we will continue upgrading our
restaurants’ ambiance through reimaging, including adding another
200 McCafes primarily in Germany and France. In addition, we will
focus on optimizing our drive-thru service, completing the con-
version of our kitchen operating system in most European
restaurants and increasing total locations offering extended and
24-hour service. We also will strengthen our local relevance by
complementing our tiered menu with new products and a relevant
variety of limited-time food events featuring beef, chicken, desserts
and coffee selections. In the area of brand transparency, we will
remain open and accessible and will continue to inform consumers
about our food quality and reputation as an employer.
In APMEA, our goal is to be consumers’ first choice when eating
out. To achieve this goal, locally-relevant strategies surrounding
convenience, breakfast and branded affordability are essential in
this diverse and dynamic part of the world. Convenience initiatives
include leveraging the success of 24-hour or extended operating
hours, offering delivery service and building our drive-thru
McDonald’s Corporation Annual Report 2008 23