Shares of McDonald's (MCD) are lower in morning trading after the company announced that it fired Steve Easterbrook as chief executive officer after determining that a consensual relationship with an employee violated company policy. Following the news, one analyst said CEO changes "of this magnitude tend to be disruptive," while another said the company may suffer from a "psychological impact" and the stock could see some near-term pressure. Several more analysts recommended buying shares on the pullback.
EASTERBROOK OUT AS CEO, KEMPCZINSKI IN: Over the weekend, McDonald's announced that its board fired CEO Steve Easterbrook for having a consensual relationship with an employee, violating company policy. Easterbrook is being replaced by Chris Kempczinski, the president of McDonald's USA, as president and CEO, effective immediately. According to the company, Easterbook was determined to have "violated company policy and demonstrated poor judgment involving a recent consensual relationship with an employee." His departure is unrelated to the company's operational or financial performance, it added.
Joe Erlinger, most recently president, International Operated Markets, will succeed Kempczinski as president of McDonald's USA.
In an email to employees on Sunday seen by The Wall Street Journal, Easterbrook said he made "a mistake." He added that, "given the values of the company, I agree with the board that it is time for me to move on." According to the company, the board was alerted to the relationship, conducted a thorough investigation and acted quickly.
WHAT'S NOTABLE: In a regulatory filing, McDonald's disclosed details of its separation agreement with Easterbrook. The agreement provides that he will be eligible for the severance benefits contemplated by the company's benefit plans upon a termination of employment, but specifies that he will be unable to work for a rival for at least two years. Specifically, the agreement called out "competitive companies" such as Arby's, BoJangle's, Burger King/Hungry Jacks, Caffe Nero, Checker's, Chick-fil-A, Chipotle (CMG), Costa, Culver's, Denny's (DENN), Domino's Pizza (DPZ), Dunkin' Brands (DNKN), Five Guys, Greggs, Hardee's, In-N-Out Burger, Jack-in-the-Box (JACK), Jamba Juice, Long John Silver's, Panera Bread, Papa John's (PZZA), Popeye's Chicken, Potbelly, Q-doba, Quiznos, Seven-Eleven, Sonic (SONC), Starbucks (SBUX), Subway, Tim Horton's, WaWa, Wendy's (WEN) and YUM Brands (YUM).
CEO CHANGE COULD BE 'DISRUPTIVE': Piper Jaffray analyst Nicole Miller Regan downgraded McDonald's to Neutral from Overweight with a price target of $195, down from $224. While the company's fundamentals are solid, CEO changes "of this magnitude tend to be disruptive," Regan told investors in a research note. As such, the analyst said she is taking a "more cautionary view" on the shares, noting the potential lack of momentum and time involved in formalizing a new management team.
Meanwhile, MKM Partners analyst Brett Levy lowered his price target on McDonald's to $225 from $240, noting that while the developments surrounding the transition may not impact results, the company may suffer from a "psychological impact" and the stock could see some near-term pressure. Levy added that McDonald's has been under pressure for a couple of months now, and the transition will not "ease any recent concerns."
BUY SHARES ON THE PULLBACK: While the CEO transition announced by McDonald's was unexpected, "and therefore not a good thing," the change was not due to operational or financial issues, but rather personal conduct, Barclays analyst Jeffrey Bernstein said. The analyst is confident the company has the depth in leadership to maintain momentum as the global quick service restaurant leader. As such, he's a buyer of McDonald's shares on any weakness. Credit Suisse analyst Lauren Silberman said that Easterbrook was "highly regarded" in the investment community and among franchisees, and potential concerns of franchisee sentiment regarding new leadership, but added that McDonald's has a "talented" bench and expects management and the board have a like-minded strategy. She said the management transition does not alter her positive view of the company, and views any material pullback pullback in the stock around the CEO change as a buying opportunity.
The departure of CEO Steve Easterbrook is a "fairly significant negative" for investors, given his history of impressive and consistent global results, Stephens analyst Will Slabaugh told investors. The analyst, however, said he likes the "quick choice" of Chris Kempczinski as the next CEO, given his existing relationships with domestic operators and "leadership experience during some of the U.S.'s best years in decades." Slabaugh also said he likes McDonald's here and views the shares as attractive on the recent pullback.
PRICE ACTION: In morning trading, shares of McDonald's are down nearly 3% to $188.80.