McDonald's Foreign Woes Under Scrutiny

McDonald's Foreign Woes Under Scrutiny

May 15, 2001 Reuters by Deborah Cohen

CHICAGO (Reuters) - McDonald's Corp.'s (NYSE:MCD - news) top brass will face their toughest critics on Thursday when the company holds its annual shareholders meeting and addresses the outlook for fast food in troubled markets such as Europe.

The Oak Brook, Illinois-based maker of hamburgers and fries recently served up its second consecutive quarterly decline in earnings, driven largely by international problems.

Nearly half of McDonald's operating profits are generated overseas.

Earnings in the first quarter fell 16 percent to $378.3 million. Analysts, who earlier this year on average had expected McDonald's to earn $1.63 a share in 2001, now expect $1.50, up just 4 cents from 2000, according to market research firm Thomson Financial/First Call.

McDonald's stock, which closed down 1 cent Monday at $27.75 in New York Stock Exchange (news - web sites) trading, fell to $24.75 in March, its lowest level since February 1998. This year the stock has trailed the Dow Jones industrial average by almost 19 percent.

The company's European woes include outbreaks of mad cow and foot-and-mouth diseases in Continental Europe, where sales have lagged due to consumer concerns about beef. A strong U.S. dollar has also hurt operating performance.

``When Europe is soft it matters big time, because Europe is one-third of earnings,'' said Joe Buckley, a Bear Stearns restaurant industry analyst. In 2000, Europe accounted for 23 percent of McDonald's total sales of $40.2 billion and contributed $1.18 billion of total operating income of $3.33 billion.

McDonald's has also seen continued sales pressure in Asia and Latin America, which have been suffering from longer-term economic downturns.

Going forward, the company must weigh whether sustained investment in foreign growth is warranted, analysts said. Some would rather have McDonald's spend more on its core business to spur gains in same-store sales, a measure of the restaurant chain's overall health.

McDonald's had 500 more restaurants in Europe at the end of the first quarter than it did a year ago, bringing its worldwide total to nearly 29,000 units. It netted 187 new units in the United States during that same period.

``We think their new unit expansion plans internationally are too aggressive and not a good return on invested capital,'' said Timothy Ghriskey, head of value investing for Dreyfus Corp., where McDonald's is a core holding.

He and others who follow McDonald's expect Chief Executive Jack Greenberg to provide an update on the company's latest management changes. These include an internal reshuffling of top responsibilities following the planned retirement of overseas business chief Jim Cantalupo. Chief Financial Officer Michael Conley is also planning to retire.

The annual meeting ``is an opportunity for shareholders to ask questions, make comments and get an update on the business,'' said McDonald's spokeswoman Anna Rozenich.

The update should also include a status report on McDonald's mainstay U.S. business, where a new operating system has been in place for more than a year and the roll-out of non-hamburger concepts is expected to boost long-term growth. The latest ventures: a U.S. diner concept called McCafe and a stake in British sandwich chain Pret-A-Manger.

``There's a lot of initiatives, a lot of things the company is doing to jump-start its business,'' said Neil Stern, a retail consultant with Chicago-based McMillan/Doolittle LLP. ``The flip side to that is there is so much uncertainty in their world position.''

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