021109 McDonald's to Close 175 Restaurants

Chicago - Fast-food giant McDonald's Corp. said it would close about 175 restaurants, slash up to 600 corporate jobs and pull out of three countries in the Middle East and Latin America as it struggles to turn around its U.S. performance and trim worldwide costs.

The actions, which will cause McDonald's to miss its 2002 earnings forecast, mark the second major round of store closings in two years. The company will also stop owning real estate in four other countries.

The overhaul is the latest attempt by McDonald's Chief Executive Jack Greenberg, who has been at the helm for four years, to take costs out of an operation that has struggled with weak U.S. sales, troubled world economies and the impact of mad cow disease outbreaks in Europe and Japan.

Wall Street questioned whether the actions, coming on the heels of seven earnings shortfalls in the last eight quarters, go far enough.

"Clearly they should have done this sooner, but it's better late than never," said Victory Capital Management analyst David Kolpak, whose firm holds 1.22 million McDonald's shares.

"Investors have been saying for some time that some of the developing market businesses need to be trimmed back, that McDonald's ... on the basis of over-optimistic forecasts, invested too quickly in some Latin American and Middle Eastern markets, ahead of those economies' ability to support demand," he said.

Shares of the Oak Brook, Illinois-based company fell as much as 13% on the New York Stock Exchange. Stock in rivals hamburger maker Wendy's International Inc. and Taco Bell parent Yum! Brands Inc. also declined.

The maker of Quarter Pounder and Big Mac hamburgers said the actions would reduce fourth-quarter pretax earnings by $350 million to $425 million, with the shortfall stemming from the combined effect of closing stores and losing their revenues, a spokeswoman said.

McDonald's said it runs 200 restaurants in the seven unnamed countries slated for exit or restructuring, signaling that it will not likely pull out of major Latin American markets like Brazil and Argentina, where falling currencies have hurt its results. At the end of September, McDonald's had a total of 1,617 stores in Latin America. The company does not have a major presence in the Middle East.

RETRENCHMENT

McDonald's, which has driven growth through rapid expansion, has boosted its store count by some 30% in the past five years to about 30,000 restaurants.

Last year, however, it closed 163 underperforming stores. In 2003, it plans to open about 600 hamburger outlets worldwide, down from a high of 2,000 in 1996 and a planned 1,300 this year.

The worldwide job cuts of 400 to 600 positions, including up to 250 in the United States, mark the company's third major round of layoffs in five years. Worldwide, McDonald's employs about 395,000 people, including store-level jobs.

McDonald's shares, which have lost more than a third of their value this year, closed down $1.52, or 7.9%, at $17.79, after dropping as low as $16.80. The percentage fall was the largest of any component of the Dow Jones industrial average.

Of late, McDonald's has returned to price discounting in the United States, an often- criticized strategy in its largest market. Competition intensified after McDonald's in September introduced a menu of $1 items, prompting a similar move from Burger King Corp., the No. 2 hamburger chain.

A return to the Hamburger Wars has been blamed for weakening the value of Burger King, whose parent, British drink conglomerate Diageo Plc (DGE.L), has been trying to complete its sale to a private equity group.

"McDonald's may become even more aggressive in throwing its marketing muscle around in 2003 than originally planned, as it tries to do whatever it can to reverse the negative U.S. comps (comparable store sales)," wrote Salomon Smith Barney analyst Mark Kalinowski.

PRESSURE FROM INVESTORS

The earnings warning places additional pressure on Greenberg, analysts said. Investors have watched in vain as McDonald's pinned its hopes on a range of initiatives, including a new production system, management shake-ups and marketing campaigns, such as its latest plug to link celebrities like real estate mogul Donald Trump with its new "Dollar Menu."

"It seems like McDonald's needs to go out and find someone with a fresh look at the company," said William Cottrell, portfolio manager at the State Teachers Retirement System of Ohio, which holds 2.5 million McDonald's shares. "I think their overall strategy is wrong that a lowering in price will add to profits."

Greenberg warned of pending job cuts when the company reported quarterly earnings last month, but he stuck to the company's earnings forecast for 2002 profits of $1.43 a share, hopeful that U.S. sales would turn around.

October systemwide sales at McDonald's totaled $3.5 billion, up 3% before the impact of foreign currency translation. But comparable U.S. sales were down 0.6%, while those in Europe were off 2.2%.

McDonald's first trimmed jobs at its headquarters operations in 1998. Last year it shed about 700 employees at its headquarters and in its regional offices as part of a domestic restructuring.

Wall Street had expected McDonald's to earn $1.40 to $1.43 a share in 2002, with an average estimate at $1.43, according to Thomson First Call.

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