991075 McDonald's Profits Up 12%October 26, 1999Oak Brook, IL - McDonald's Corp. said its third-quarter profits rose 12% and beat Wall Street expectations on strong results at its restaurants in the United States and Europe. Net income for 1999 third quarter was $541 million, or 39 cents a share, up from $482 million, or 34 cents, a year ago. A survey of analysts by First Call/Thomson Financial estimated McDonald's third-quarter income at 38 cents a share. “McDonald's third-quarter results reflect the continued strong performance of our U.S. business and our success internationally, despite the difficult economic environment in several areas of the world,” Jack Greenberg, chairman and chief executive officer of McDonald's said in a statement. Systemwide sales from company-owned and franchised restaurants rose 8% in the third quarter to $9.99 billion, versus $9.25 billion in the year-ago quarter. Revenues, or sales for company-owned restaurants, climbed 7% to $3.44 billion from $3.22 billion a year ago. An analyst said the company's results were positive overall, but some investors could be focusing on difficulties McDonald's is facing in some international markets as well as a decrease in margins in the U.S. “We know that Japan, Russia and Brazil remain challenging and margins are weak in some areas, particularly on labor costs,” said Patrick Schumann, analyst with Edward Jones. In a conference call with analysts, McDonald's said its hourly average labor rate in the U.S. had climbed about 6% from the second quarter, which weighed on margins. “For the quarter, there's a continuing pressure on crew hourly labor rates throughout the industry in the U.S.,” Michael Conley, McDonald's chief financial officer told analysts. “They do put some pressure on margins and fortunately commodity costs for the most part have been user friendly.” Comparable sales growth rather than labor costs is the primary driver of margins, and margin growth is expected looking forward, Conley told analysts. U.S. systemwide sales in the quarter rose 6% to $4.87 billion, helped, in part, by an Inspector Gadget toy promotion. Greenberg said the company plans to open a modest number of new stores in the U.S. in 2000 and will continue to grow that portion of its business through same-store sales increases. McDonald's also said it expects to open about 1,800 restaurants in the year 2000, compared with its target of opening 1,750 stores in 1999. In constant currencies, sales rose 19% in Latin America, 10% in Europe, and 6% in Asia/Pacific. The company said the massive earthquake in Taiwan on September 21 hurt sales at its 300 company-owned restaurants in that country and would also hurt its Asia/Pacific results in the fourth quarter. Brazil's currency devaluation tempered overall growth in McDonald's Latin American markets, but the company said it was cautiously optimistic that improvements in Brazil's economy will bolster operating results going forward. McDonald's also said that nearly 12,000 restaurants, including all Canadian and more than 85% of McDonald's restaurants in the United States are using the company's Made For You food preparation system. The Made For You system -- designed to allow restaurants to prepare food at a faster rate, at hotter temperatures and with less waste -- is on track to be installed in virtually all U.S. stores by the end of 1999, McDonald's said. The new Made For You system will also give the fast-food chain a platform for menu innovations, which is expected to contribute to growth, Greenberg said. Looking forward, Greenberg was optimistic about the company's prospects for the balance of the year. “I think we still have a good deal of optimism that we'll finish the whole calendar year with the kind of momentum we've been showing,” he said. At the end of the third quarter, McDonald's operated 25,759 restaurants worldwide, with about 12,529 in the U.S.
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