Chicago - McDonald's Corp., trimming fat from its budget, said its second quarter net income will drop by $235 million or 33 cents per share thanks to $350 million in previously announced charges.
McDonald's will take a $160 million second-quarter pretax charge to cover the cost of job reductions and another $190 million pretax charge for introduction of a new “Made for You” food preparation system.
Confirming an announcement made last month, the fast food giant is cutting its home office staff by 23%, or about 525 jobs, over the next 18 months. About 100 of those jobs are open positions that will not be filled, said chief financial officer Michael Conley in an interview.
Another 120 are in an insurance claims processing area that will be outsourced, Conley said, with the rest spread out among various departments, particularly accounting, development and information services.
The job cuts are the first ones ever in McDonald's 43-year history.
The company said it expects to save about $100 million per year in home office general and administrative expenses, about 20% of the costs in that area that McDonald's set out to examine in March as part of a productivity study.
Asked if the field organization might also cut costs, Conley said, “They're working that all the time. There's always potential, there's always something to do to optimize efficiencies. We've got opportunities probably in a lot of areas of our business--not only to make customers happier but also to make costs more efficient.”
Two-thirds of the savings should be seen in 1999 with the rest coming in the year 2000. Conley said over half of the $100 million savings is in employee- related costs and consolidation of facilities.
Mitchell Speiser, analyst at Lehman Bros., applauded the announcement, calling it a step toward a “leaner and meaner” McDonald's.
“This is a pretty big move here,” Speiser said. “Next they've got to start reaping the benefits
these initiatives.”
He said he is increasingly confident of his second quarter earnings estimate of 66 cents to 67 cents per share on an operating basis. The Wall Street mean estimate is 65 cents per share according to First Call, versus 61 cents per share earned in the year-ago period.
Conley declined to comment on the estimates.
One positive factor for the quarter is the recent McDonald's Beanie Baby promotion. Although he declined to be specific about sales, Conley said the promotion “exceeded our expectations.”
Merrill Lynch analyst Peter Oakes said he pegs domestic sales for the second quarter up 7%.
Analysts said while today's announcement was positive, it is just one step in an overall realignment of McDonald's business.
Dean Haskell of Everen Securities said, “It doesn't change the company's growth rate substantially,” which he pegged at 11% over the next five years. “I believe the company needs to improve their food quality and food taste.”
As for menu changes, Conley said a new fish filet sandwich is “doing very well” in over 9,000 stores. Also testing well are “Big Extra” beef sandwich and Chicken Selects, he said.
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