UPDATE 4-McDonald's warns on profits; stock tumbles 13 pct ( wasn't surprised at this )
(Adds more analyst comment paragraphs 8, 9)
By Vivian Chu
NEW YORK, Sept 17 (Reuters) - McDonald's Corp. <MCD.N> on
Tuesday said its quarterly earnings would miss analysts'
expectations and fall from a year earlier due to weak sales in
the United States and Europe, marking a return to a long slide
in earnings by the No. 1 fast-food chain.
Shares of McDonald's fell almost 13 percent to a seven-year
low, as investors were unimpressed with company plans to boost
flagging sales. The stock was the most active issue on the New
York Stock Exchange.
McDonald's also said it would cut back on new openings -- a
possible brake on future growth -- to help finance the overhaul
of some of its restaurants. It also plans to pare the amount of
shares it buys back to about $500 million next year, or less
than half the $1.1 billion it spent in 2001.
"Growth expectations for this company have been unrealistic
for several years, and management is gradually and reluctantly
resetting expectations for investors," said U.S. Bancorp Piper
Jaffray analyst Allan Hickok.
"In the long term, the outlook is that this is a large,
mature company whose earnings growth rate is likely to be in
the low to mid-single digits range. McDonald's is a great
company, but not a growth company."
McDonald's said it would invest between $300 million to
$400 million to remodel some of its restaurants starting next
year, part of a strategy to drive U.S. sales it announced
earlier this month.
"Our experience and our research shows that many consumers
would visit a revitalized McDonald's more often," said Mike
Roberts, president of the company's U.S. operations, in a
conference call with analysts.
However, analysts were skeptical that restaurant upgrades
would drive sales. In the past, McDonald's has said that poor
customer service was the main source of customer complaints.
"Having a better-looking building does nothing to fix rude
service, slow service, or inaccurate order fulfillment," wrote
Salomon Smith Barney analyst Mark Kalinowski in a client note.
The company also said it would spend $20 million on top of
its current budget in the fourth quarter to advertise its
upcoming "Dollar Menu," comprising eight menu items priced at
$1 each, which it has billed as a major sales driver.
The Oak Brook, Illinois-based company said it expects
third-quarter earnings of 38 cents to 39 cents per share, well
below Wall Street's consensus forecast of 42 cents, the average
estimate compiled by market research firm Thomson First Call.
In the year-earlier period, McDonald's reported net income of
$545.5 million, or 42 cents a share.
McDonald's also cut its earnings outlook for the full year.
It forecast 2002 earnings per share to be $1.43 or better,
excluding previously announced first-quarter charges. Including
the charges, it pegged full-year earnings per share at $1.31 or
better, compared with $1.25 in 2001.
Wall Street had expected earnings per share of $1.49 for
the year, according to First Call. In July, McDonald's had
forecast 2002 earnings per share of $1.47 to $1.53, excluding
the first-quarter charges.
EUROPE A SURPRISE
The outlook indicates McDonald's will revert to a string of
earnings declines over the past two years. The company reported
six straight quarters of earnings declines until July, when
earnings were helped by a strong U.S. dollar and lower costs.
In the United States, McDonald's said sales in restaurants
open for more than one year -- a key measure of restaurant
performance -- fell 2.7 percent. In Europe, same-store sales
declined 0.7 percent, said executives in the conference call.
McDonald's attributed its outlook on weaker-than-expected
sales in Germany, where the economy continues to contract, and
in the United Kingdom, where retail sales have slowed. It also
blamed its marketing, which it said had failed to resonate with
consumers in those markets as much as it had hoped.
The earnings miss surprised some analysts, particularly
since Europe -- where fears of mad cow disease decimated sales
last year -- was believed to be on the rebound. Germany, the
U.K. and France are McDonald's top three markets in Europe,
which accounts for about 35 percent of total operating income.
"We knew U.S. comparable-store sales would be weak, likely
down 2 percent, but the big negative surprise is Europe, where
comparable sales likely fell at least 2 percent," wrote Lehman
Brothers analyst Mitch Speiser in a note to clients, adding
that McDonald's "missed big."
McDonald's said it will open fewer than the 1,300 to 1,400
new restaurants it had planned to open this year, said Chief
Financial Officer Matthew Paull in the call. At the end of
June, McDonald's operated about 30,500 restaurants worldwide,
with 13,223 in the United States.
Shares of McDonald's closed at $18.91 on the NYSE, a penny
off a session low set just before the close. They have fallen
about 28 percent so far this year, compared with an 18 percent
drop in the Dow Jones Industrial Average and a 15 percent
decline in the Standard & Poor's Restaurant Index.
((-- Vivian Chu, New York Equities Desk, 646-223-6000))
REUTERS
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