020133 McDonald's 4Q Earnings Down 40%January 24, 2002Chicago - McDonald's Corp. earnings tumbled 40% in the fourth quarter, a fifth straight decline that the fast-food chain blamed on the global recession and a lingering mad cow disease scare overseas. After seeing profits for the year decline 15%, company executives forecast earnings would improve significantly in 2002 - citing a renewed focus on quality, service and cleanliness in U.S. restaurants that they hope will boost long-stagnant domestic sales. "We were glad to bid farewell to 2001, clearly a year of unforeseen pressures on many companies, including ours," chairman and CEO Jack Greenberg said. "The McDonald's brand is strong, our business is resilient and we have taken action to improve our customers' experience and drive long-term success." Analysts are taking a wait-and-see attitude, citing weak operating margins in the United States and double-digit sales declines in Latin America and Japan, where a September outbreak of mad cow disease has left consumers leery of beef. "They're doing the right things, but they still face cost pressures, labor costs, menu challenges," said Ann Gurkin of Davenport & Co. The Oak Brook, Ill.-based hamburger giant's stock fell 93 cents, or 3.4%, to close at $26.47 a share on the New York Stock Exchange, down nearly 50% from its peak in November 1999. Net income for the fourth quarter was $271.9 million, or 21 cents a share, down from $452 million, or 34 cents a share, in the same period a year earlier. Excluding special items such as a restructuring of U.S. operations, earnings were 34 cents a share, matching the estimate of analysts surveyed by Thomson Financial/First Call. Revenues rose 5% to $3.78 billion from $3.59 billion. Systemwide sales, which include company-operated and franchised stores, climbed 2% to $10.11 billion thanks partly to new store openings. The company added 1,319 McDonald's restaurants last year, for a total of about 29,000 in 121 countries, and 67 restaurants of its partner brands - Aroma Cafe, Boston Market, Chipotle and Donatos Pizza. Greenberg said it expects to add another 1,300 to 1,400 McDonald's and 100 to 150 other restaurants in 2002. McDonald's cited strong sales gains in European countries where it was hardest-hit by the mad cow slump last year - France, Britain and Germany. But its new strategy in the U.S. market shows its concern about widespread perceptions that its service and cleanliness have deteriorated, hurting sales, even though same-store sales were "slightly positive" in the fourth quarter. Among the changes, McDonald's said it is simplifying operations, offering fewer selections in its New Tastes menu but making them available longer, and starting an incentives program to ensure improved performance at its restaurants, a majority of which are run by franchisees. "That's what can happen when you're adding three or four stores a day and you're totally focused on growth," analyst Douglas Christopher of Crowell Weedon said of the recent problems. "From an operating standpoint, they're emphasizing the right things now, which are quality, service, cleanliness and value." Bottom-line results may not be immediately evident. McDonald's said it expects to take a $20 million charge in the first quarter for improvements to U.S. front-counter equipment, and officials said the quarter will be more challenging than the rest of this year. For the full year, net earnings were $1.64 billion, or $1.25 a share, down from $1.98 billion, or $1.46 a share, the previous year. Revenues were $14.87 billion, up 4% from $14.24 billion in 2000. Systemwide sales rose to $40.63 billion from $40.18 billion.
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