021033 McDonald's Profits Drop 11 Percent

Chicago - McDonald's Corp., reporting lower profits for the seventh time in the past eight quarters, said it will pare new restaurant openings nearly in half in 2003 and invest more heavily in its sluggish U.S. business.

Third-quarter earnings of $486.7 million were an 11% drop over the previous year and reflected lower sales in the United States, Germany, Britain and Japan — all of its five biggest markets but France — among restaurants open at least a year.

The hamburger giant, struggling amid the glut of U.S. restaurants and perceptions of poor service, among other problems, also said it needs a "significant improvement" in sales to achieve its full-year earnings target.

But industry experts saw nuggets of hope that the McSlump might soon end.

Analysts took heart from McDonald's commitment to putting less on its plate in terms of expansion and from its report of an October rise in long-stagnant U.S. sales, thanks to strong early results from its promotion of $1 menu items.

"Their third quarter was nothing to write home about," Merrill Lynch analyst Peter Oakes said. "But it looks like the tide's starting to turn on the U.S. front."

Shares surged as much as 9% and closed up 65 cents to $18.95 on the New York Stock Exchange. The stock had sunk to a seven-year low of $15.75 on Oct. 10.

The Oak Brook, Ill.-based company said it now plans to open 600 traditional McDonald's restaurants worldwide next year, down from 1,050 in 2002, including just 100 in the United States — less than a third of this year's total.

It also will step up its investment in the other chains it owns and expects to open 150 to 175 of those restaurants in 2003, primarily involving Chipotle Mexican Grill but also Boston Market and Donatos Pizzeria.

"There was modestly positive news in the fact that McDonald's recognizes it needs to deflect its focus on growth to improving the financial performance of its existing asset base," said U.S. Bancorp Piper Jaffray analyst Allan Hickok. "The company has opened 8,000 units since early 1997 and its stock price has recently lost 60% of its value. So obviously growing has not contributed to shareholder value."

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