010634 McDonald's Warns Earnings To Miss Expectations

Chicago, IL - Fast-food giant McDonald's Corp. forecast that its second- quarter earnings would be below Wall Street expectations, as a strong U.S. dollar and lingering concerns over mad cow disease in Europe continue to hurt results.

The news, which sent McDonald's shares more than 4% lower on the day, marked the third quarterly earnings warning in a row for the world's largest restaurant company.

In a reversal of its bullish overseas expansion strategy, McDonald's also said it would cut capital spending in parts of Latin America and Asia, where economic downturns have slowed consumer demand for its menu of hamburgers and french fries.

McDonald's -- based in the Chicago suburb of Oak Brook, Illinois -- said it expects to earn 34 to 35 cents a share in the second quarter, down from 39 cents last year. The company was slated to earn 36 to 40 cents, with a mean estimate of 38 cents, according to a poll of 16 analysts by research firm Thomson Financial/First Call.

“Clearly we are not satisfied with the near-term earnings scenario we have described today,” chairman and chief executive Jack Greenberg told analysts on a teleconference to discuss forecasts. He added that McDonald's latest earnings projections, which call for “relatively flat” 2001 earnings on a constant currency basis, are “realistic.”

If currency exchange rates remain as they are, the company said the strong U.S. dollar could shave about 6 cents off full-year reported earnings. The “Golden Arches” can be found in about 120 countries worldwide. First Call pegs 2001 reported earnings at $1.49 a share on average, compared with $1.46 earned a year ago.

The company stressed its latest measures to strengthen global sales, including adding more non-beef menu items in key overseas markets and a renewed emphasis on food quality and cleanliness in the U.S., would result in sequential earnings improvement for the remainder of 2001.

“The magnitude of (the warning) was a little more than I thought,” said Bear Stearns analyst Joe Buckley. “Europe looks a little bit more negative than I thought against an easy comparison. The direction was what was expected.”

STOCK FALLS FOLLOWING GUIDANCE

Shares of McDonald's, a component of the Dow Jones Industrial Average, fell $1.29 cents to close at $28.67 on the New York Stock Exchange.

The stock has fallen steadily since late last year, when it was trading in the $30 range before the company said that outbreaks of mad cow disease were pressuring hamburger sales in key European markets such as Germany and France.

In addition to its European problems, McDonald's said increased costs, such as higher beef prices; soft economies in other markets; and difficult sales comparisons caused by strong marketing promotions in 2000, were hurting profits.

Systemwide sales in the first two months of the second quarter were up 6% on a constant currency basis, but only 2% on a reported basis, compared with the same periods in 2000, McDonald's said.

The company ran a highly successful Happy Meal promotion in last year's second quarter featuring Teenie Beanie Babies toys in the United States.

Global sales, which include company-owned and franchised restaurants, increased to $16.4 billion for the first five months of 2000, roughly flat from $16.2 billion a year earlier.

Amid weakness in some emerging markets, McDonald's said it trimmed its 2001 capital expenditures by 25% and is reviewing its budget for 2002.

In Argentina, a 35-month recession has forced the company to cut its investment plans for the year to 25% of normal levels, McDonald's said earlier in the week.

In Brazil, where the currency has devalued, the company has raised its prices by 5%.

REIT STILL A POSSIBILITY

In response to questions from analysts, McDonald's said it is considering spinning off some of its restaurants into a tax-free real estate investment trust (REIT) that could help boost results and lift its sagging stock price, analysts said.

“A McReit would provide incremental EPS to the combined MCD/McReit entity,” wrote Lehman Brothers analyst Mitchell Speiser in a Friday report.

The company previously considered the possibility of a REIT in 1998, when REIT stocks were performing well. McDonald's owns most of its 13,000 U.S. stores and charges its operators rent, which is subsequently taxed.

McDonald's also reiterated first-quarter expectations of adding about 1,500 new restaurants in the year.

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