020752 McDonald's Profit Up on Lower Costs

New York - McDonald's Corp. posted its first quarterly earnings increase in more than a year, as lower costs and new restaurant openings helped offset weak sales.

The results ended a losing streak for the world's No. 1 restaurant chain, which has posted earnings declines in the previous six quarters amid weak sales in several markets, including its core U.S. market.

"Our top line sales are clearly not where we want them to be," said McDonald's Chief Executive Matthew Paull in a conference call with analysts. The company aims to improve service, increase store hours at some locations, and introduce new menu items, he said.

McDonald's will also spend more on national advertising, saying it has "confused" consumers with a wide range of advertising across various local media.

"We have not delivered very consistent or aligned messages, and we'll do a better job of that," Paull said.

Faced with a saturated fast-food market, fierce competition and a perception of poor food and service, McDonald's has been searching for ways to boost sales in the United States, which contributes about 60% of total operating income.

It recently set up a toll-free customer comment hotline in its U.S. restaurants. Last year, it also launched a campaign focusing on improving quality, service and cleanliness to address complaints about bad service. But many analysts have said it will take a long time to make an impression on customers.

Analysts expressed concern over the decline in sales at stores open at least a year, which fell everywhere except in Europe, where sales were hammered last year by fears of mad-cow disease. Same-store sales represent sales at restaurants open for at least 13 months, and are a key measure of performance.

"The earnings came in slightly ahead of expectations, which was positive. But what worries me is that same-store sales in the quarter were very weak," said Mark Kalinowski, restaurant analyst at Salomon Smith Barney.

McDonald's same-store sales in the quarter fell 2.5% globally, and declined 1.6% in the United States. In Japan, they tumbled 11.7% over the prior year.

"Those are numbers that don't give me added confidence in the outlook for the company," Kalinowski said.

McDonald's stock ended down 7 cents at $23.77 on the New York Stock, a volatile day on Wall Street. The shares have declined about 10% so far this year, versus a 27% in the Standard and Poor's 500 Index, and have traded between $22.80 and $31 over the past year.

McDonald's, based in Oak Brook, Illinois, posted second-quarter net income of $497.5 million, or 39 cents a share, up from $440.9 million, or 34 cents a share, a year earlier. The results were in line with the company's guidance in June.

SLUGGISH SALES

Systemwide sales, comprising sales by company-owned and franchised restaurants, rose 2% to $10.43 billion for the quarter. Revenue, comprising sales by company-owned restaurants and fees from franchisees, rose 4% to $3.86 billion.

McDonald's attributed higher quarterly sales and revenue to new restaurant openings. It opened 1,214 new restaurants systemwide in the quarter, bringing the total number of outlets to 30,464 as of the end of June.

It forecast a mid-single digit increase in systemwide sales for the year, on a constant currency basis. It also said it expects to generate positive same-store U.S. sales in the second half of this year, driven by its customer service initiative and better marketing, Paull said during the conference call.

Still, many analysts are not convinced that McDonald's can drive positive same-store sales, which they said is essential for it to deliver on its earnings targets.

"McDonald's traffic remains negative, while same-store sales of other publicly traded hamburger chains like Wendy's and Sonic Corp. are handsomely positive for the last several years," said U.S. Bancorp Piper Jaffray analyst Allan Hickok. "They have to have positive same-store sales to protect profitability, and not rely on opening new restaurants."

In Japan, sales have yet to rebound from a steep downturn after mad cow disease surfaced there last September. Earlier this month, the company cut hamburger prices in Japan to the lowest-ever level to try to reverse an eight-month-long decline in same-store sales.

McDonald's said it expects lingering mad-cow disease fears in Japan, as well as weak economies in Latin America, would hurt its business in those markets over the near term.

Source: Reuters

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