McD sales still sliding; leaner profits expected – News

McD sales still sliding; leaner profits expected – News – Statistical Data Included

Amy Zuber

OAK BROOK, ILL. — Wall Street is casting a cloud of doubt over McDonald’s Corp.’s latest plan to revive its flailing business after the company warned that recent disappointing sales in both the United States and Europe would lead to lower profits for 2002.

In response to skepticism over a strategy that includes sprucing up older restaurants and assigning outside order takers, McDonald’s shares took a major hit, tumbling to seven-year lows at least twice in September and closing below $18 at least once this month. The stock’s 52-week high was $30.72, and earlier this year it had traded between $25 and $30 a share.

“As the leader of this great company, I am not going to mince words,” Jack Greenberg, McDonald’s chairman and chief executive, said in a statement. “No one is happy with our recent performance, most of all me. But let me assure you that our brand and our worldwide system are strong, and so are the plans to turn our performance around.”

The world’s largest restaurant chain said it would scale back global expansion next year to fewer than the 1,300 to 1,400 branches slated for 2002. Instead, the company said it would invest hundreds of millions of dollars in domestic efforts, like boosting national advertising for the upcoming launch of its $1 menu, remodeling older restaurants and reimbursing franchisees squeezed by those initiatives.

But restaurant analyst John Ivankoe of J.P. Morgan Securities in New York noted that since the fourth quarter of 1999, “McDonald’s business has generally been below expectations, and the company’s credibility has been hurt by failed strategies that have not been able to drive results. Frustration is extraordinarily high, and we think this stock should remain a ‘prove it’ story for some time.”

McDonald’s forecast that 2002 per-share earnings would be $1.31 “or better,” including $142 million in charges in the first quarter. That compares with EPS of $1.25 in 2001. In July McDonald’s had said it expected full-year earnings per share of $1.35 to $1.41, including the charges. The company also forecast earnings of 38 to 39 cents per share for the third quarter, which compares with 42 cents in the year-ago period.

During a conference call updating third-quarter results, McDonald’s blamed the downward revision in earnings on weaker-than-expected trends in both the United States and Europe, where same-store sales dipped 2.7 percent and 0.7 percent, respectively, in July and August vs. results in those months last year.

Executives said the new plan would enhance the ongoing program to improve U.S. operations, which includes crew incentives and a national grading program that has included more than 120,000 mystery shoppings so far this year.

“When the owner-operator isn’t meeting minimum standards, we must and will act swiftly to remove them from the system,” Mike Roberts, president of McDonald’s U.S. business, told analysts during the quarterly update.

Greenberg said mystery-shop scores are up more than 2.5 points since the company kicked off the program in February, but he acknowledged that “sales progress is taking longer than we expected.”

Wall Street, however, also was concerned that same-store sales fell in Europe, which earlier this year had been McDonald’s strongest-performing region after making a recovery from the madcow scare that sent sales plummeting in 2001.

“McDonald’s has lost ground in its turnaround effort,” noted restaurant analyst Joe Buckley of Bear Stearns in New York. “The reversion to negative same-store sales in Europe is discouraging. The U.S. business is more troubled than expected. Turnarounds take time, and this one is obviously no exception.”

McDonald’s, in detailing its action plan, said it would spend $300 million to $400 million over the next 18 to 24 months to help existing franchisees upgrade units that are 15 years or older. Officials reiterated that funding decisions would be made on a case-by-case basis with a limit of $150,000 per store.

In a document sent from Roberts to franchisees and obtained by Nation’s Restaurant News, McDonald’s recommended that operators “put a crew member outside” to take orders from cars in the drive-thru lane. The document also suggested remodeling elements, such as the red roof and applying fresh paint and installing better lighting. Those tactics send “a message to the community that something different is happening at McDonald’s,” the document said.

Wall Street analysts questioned the viability of the chain’s current remodeling program, predicting that sales returns would not be high enough to justify the company’s investment.

“I don’t perceive their buildings to be in disrepair, so I don’t see the real driving force behind this,” said Andy Barish, a San Francisco restaurant analyst with Banc of America Securities.

Just two years ago McDonald’s completed a massive U.S. face-lift program — including fresh exterior paint on the restaurants — with the launch of the “we love to see you smile” campaign under the direction of former McDonald’s U.S. president Alan Feldman.

Barish estimated that if McDonald’s spends on average $100,000 per restaurant in its newest remodeling initiative, it would be able to remodel about 20 percent to 25 percent of its 13,000 U.S. stores.

Franchisees also are concerned about the cost of the program because if they don’t reach certain sales goals within two years, they have to pay back the company through increased rent, according to Dick Adams, a San Diego-based franchisee consultant who works with McDonald’s operators.

Adams said operators also face higher labor costs, as McDonald’s has asked them to increase their staff during the lunch rush in order to speed up service. Since “Made for You” was rolled out in 1999, the system has been accused of slowing down service times markedly.

“Mike Roberts has the impossible job of trying to improve service without criticizing or making substitutive changes to the Made for You cooking system,” Adams noted. “The franchisees were told that if Made for You didn’t work and changes needed to be made within five years, McDonald’s would pick up the tab…. That five years has about two years left to run.”

Looking ahead toward 2003, McDonald’s said it plans to continue unveiling new products and improving old ones. Local markets currently are testing such items as premium entree salads, flatbread sandwiches and McGriddles, a breakfast specialty with sausage and syrup stacked in between two pancakes.

Meanwhile, officials said the company would spend $20 million to increase its fourth-quarter advertising efforts, which will include a major push of a $1 menu being launched Nov. 1.

McDonald’s also has budgeted between $4 million and $9 million over the next six months to subsidize a limited number of franchisees whose profits are squeezed by the $1 menu.

COPYRIGHT 2002 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2002 Gale Group