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Money manager Bob Olstein, interviewed for our April 9, 2004 show, cites McDonald's as a successful turnaround story. At the start of 2003, the fast food chain was a mess. Earnings had fallen seven of the last eight quarters and the stock had lost more than half of its value over the past eight months. News articles described the company as a "slow-moving monolith" and pundits dismissed it as a lost cause.

Just about the only outsiders hanging on were value managers, always out to sniff a good bargain. First Eagle Funds' Jean Marie Eveillard snapped up shares largely because, if nothing else, McDonald's 13,000 franchises presented massive real estate assets at a relatively cheap price. But institutional managers like Eveillard and Olstein, as well as observers such as the popular financial weekly, Barron's, also argued that the company could do better with the restaurants themselves. Fifteen months ago Olstein sent McDonald's newly appointed CEO, James Cantalupo, a letter that echoed the view of many investors at the time:

January 8, 2003

Dear Mr. Cantalupo:

The Olstein Financial Alert fund, in which I am Chairman and Chief Investment Officer, owns one million shares of McDonald's. As any shareholder, I am interested in seeing shareholder value increased. I had previously written a litter to Jack Greenberg, beforehe retired, concerning increasing shareholder value. In the interm, as I was writing this letter to you, I received a response from Ms. Lisa Ivinjack Ciota, the Director of Investor Relations, in which she sidestepped the issues I had raised. I am concerned that these issues are not being brought to the attention of the appropriate persons in management.

We became shareholders of McDonald's under the assumption that the company's new management would see the light and stop expanding as a means of enhancing shareholder value. We believe that the huge excess cash flow that would be produced in a no growth scenario should be utilized to shrink the company. Rather than utilizing the excess cash flow to open new restaurants, which cannibalizes existing restaurants, the cash flow can be more profitably employed at a higher return under a stock buy back program.

Wall Street has a cult for growth. However, there are many companies today, such as McDonald's that have built outstanding business models. By satisfying Wall Street's cult for growth, these companies are actually destroying shareholder values. Franchise brands, such as McDonald's and Home Depot, need to look at the Gap to see how the Gap has finally realized that cutting back square footage creates more value than adding to square footage. McDonald's store openings over the past few years have resulted in minimal sales growth and declining returns on capital. Why not achieve growth by using your excess cash flow to buy back stock and improve your returns on capital? If you continue to add square footage, we believe McDonald's stock price will go lower and lower until management eventually gets the message or is replaced.

It takes great intestinal fortitude to stray from pleasing crowds. Become a leader, as opposed to a follower. Stop adding to your store base especially where restaurants are cannibalizing existing stores. Close stores that do no meet minimum returns on investment criteria. Do not aspire to profitless prosperity by increasing market share at the expense of profits. Perhaps the $1 is counter productive. Return on investment is more important than sales growth. Use your excess cash flow to buy back your shares. The adoption of our suggested strategy should result in a period in which McDonald's stock price would appreciate 50% or more in a reasonable amount of time as investors absorb the intelligence of such a move. Return on capital should be your goal rather than growth.

I would greatly appreciate a response from you to the issues raised in this letter, especially on McDonald's need to reduce capital expenditures below depreciation to enable McDonald's to implement a significant share buy back program.

I eagerly await your thoughtful response.

Sincerely,
Robert A. Olstein
Chairman

P.S. I have included a Barron's article, which clearly articulates a strategy similar to ours."

Olstein's view wasn't unique: Many outsiders urged similar views, and Cantalupo embraced the same perspective when he became CEO. McDonald's stock price bottomed out at $12.19 on March 12, 2003. Over the 13 months since, McDonald's shares, have risen 135 percent as the company stopped expanding, shut down unprofitable franchises and said it would concentrate on quality at the remainder.