010728 McDonald's Posts Second-Quarter Earnings

Chicago - McDonald's Corp. the world's biggest restaurant company, reported its third consecutive quarterly earnings decline as Europeans curbed their appetite for hamburgers following outbreaks of mad cow disease.

Net income in the second quarter fell 16 percent to $440.9 million, or 34 cents a share, from $525.9 million, or 39 cents, in the year-ago period. Earnings began to decline in the last year's fourth quarter when mad cow disease, the fatal, brain-wasting disorder, spread to cattle herds in Continental Europe. It was never linked to any McDonald's hamburgers.

Systemwide sales were essentially flat at $10.238 billion compared with $10.237 billion a year earlier. Sales in the United States, McDonald's largest market, ticked down slightly to $5.188 billion from $5.192 billion a year ago. Sales in Europe, which account for nearly one-fourth McDonald's total, fell 2 percent to $2.27 billion from $2.33 billion.

The Oak Brook, Illinois-based purveyor of Big Mac and Quarter Pound hamburgers results were in line with analysts mean estimate of 34 cents a share, according to Thomson Financial/First Call, which tracks results. The company warned of an earnings shortfall in mid-June.

“The earnings themselves are very weak, but the hope is that this is the low point,” said Damon Brundage, a restaurant analyst with Raymond James.

Shares of McDonald's rose as much as 82 cents, or 2.9 percent, to $28.59, in early trading as investors took heart that the company would hold fast to its second-half earnings forecast, before closing down 62 cents to $28.39 on the New York Stock Exchange.

McDonald's said it still expects flat year-over-year earnings before the impact of a strong U.S. dollar. Analysts peg 2001 earnings at $1.40 a share, down from $1.46 last year, First Call said.

Beside sales mad cow pressures, results continued to be hurt by weaker currencies such as the euro, British pound, Japanese yen, Australian dollar and British real, which cut into profits.

McDonald's also had a higher tax rate in this year's second-quarter, and took a $24 million charge related to currency devaluation from the financial crisis in Turkey, which analysts estimate shaved about a penny and a half off reported results. Worldwide operating margins were down, with declines in the United States prompted by a labor crunch that forced higher wages.

Management said that improved trends in Europe may signal a turn-around for the fast-food giant, which competes against rivals Tricon Global Restaurants and Diageo plc unit Burger King Corp. (quote from Yahoo! UK & Ireland: DGE.L).

BEEF SAFETY STILL A CONCERN

“We've seen progress, but there are still consumer concerns about the safety of the European beef supply in certain markets,” McDonald's Chief Executive Jack Greenberg said in a statement. “We are hopeful the worst is behind us and Europe's results will continue to improve.”

Operating income in Europe fell 11 percent to $264.2 million from $297.1 million. Sales in some European markets showed improvement in the period, the company said.

McDonald's has also seen improvement in China, Japan and several Southeast Asian markets, offset by weak consumer spending in Australia and markets in Latin America.

U.S. operating income fell 1 percent to $475.5 million from $481.9 million. A drop in same-store sales in the United States, or those at stores open at least one year, resulted from difficult comparisons against last year's highly popular Teenie Beanie Babies plush toys Happy Meal promotion, its fourth-most successful ever.

The company is working to improve U.S. customer service, following a decline in survey rankings and complaints of delayed orders, dirty restaurants and unpleasant staff.

“We know we have challenges in the service area and we are serious about making the operational changes needed to overcome them,” investor relations spokeswoman Mary Healy said.

McDonald's, which operates more than 29,000 restaurants worldwide, also said it is reviewing some 250 restaurants for closings. The closings are likely to result in charges in the second half of 2001, the company said.

“If this is the first phase of a broad store closing program, it could be significant,” Raymond James' Brundage said, adding that McDonald's has grown too rapidly in overseas markets in recent years. On the conference call, officials said the restaurant review did not constitute a trend.

An initial public offering of McDonald's Japanese business, which is structured as a joint venture, is scheduled for July 26, the company said. It plans to retain 50 percent ownership and will post a $130 million, one-time gain in the third quarter.

Shares of McDonald's have underperformed the Standard & Poor's 500 Index by about 10 percent this year. The shares have lost more than a fourth of their value since January 2000 when they were trading above $40

In the first six months of the year, McDonald's bought back 24.4 million shares for about $738 million.

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