020358 McDonald's Issues Earnings Warning

Chicago - McDonald's Corp. warned that profits are being hurt by weak currencies and its first-quarter earnings will be slightly below Wall Street's expectations despite some encouraging signs from its European and U.S. restaurants.

The fast-food giant said that while European sales have rebounded strongly this year -- rising 8 percent in constant currencies through February -- the weakened euro has weighed on results.

Also, concerns about the safety of beef in Japan continue to affect sales in that country. Japanese consumers have been leery of beef since a September outbreak of mad cow disease, although McDonald's stressed that its restaurants in Japan use beef only from Australia and New Zealand.

Another continuing weak spot is Latin America, where sales were down 3 percent for January and February even excluding the considerable impact of currency changes.

The outlook was better for the company's U.S. business, where sales for the first two months of 2002 were 3 percent higher than the same period a year ago. Jack Greenberg, chairman and chief executive officer, attributed the gains in part to McDonald's renewed efforts on quality, service and cleanliness -- a push that resulted from increased customer complaints.

"We believe our U.S. initiatives will drive the business forward, and expect sales to increase in the low single digits for the quarter and mid-single digits for the year as we gain momentum," he said.

Excluding new restaurants, same-store sales were flat. And McDonald's said it expects operating earnings from the U.S. business to decline in the low- to mid-single digits as a result of $22 million in payments to help stores change the way their front counters handle orders.

Analyst Ann Gurkin said it's too early to say if the U.S. initiatives are working, but she still found the results encouraging.

"Sales are a little bit better than I expected in the U.S.," said Gurkin of Davenport and Co. "Certainly sales in Europe were better than we'd looked for."

McDonald's said it expects to take a $45 million non-cash charge for the quarter for closing 32 under-performing restaurants in Turkey and related to the impairment of assets in Latin America. It also anticipates a $100 million non-cash charge for the impairment of goodwill, primarily the result of weakened economies in Latin America.

Excluding those charges, the hamburger purveyor now projects first-quarter earnings of 29 cents to 30 cents per share - at the low end of its previously issued guidance range and just below the 31-cent consensus estimate of analysts surveyed by Thomson Financial/First Call.

RETURN TO HOME PAGE

E-mail: sflanagan@sprintmail.com