McDonald's takes third straight quarterly hit from Europe beef scare

McDonald's takes third straight quarterly hit from Europe beef scare

July 24, 2001 Associated Press by Dave Carpenter

McDonald's Corp. profits dropped 16 percent in a third straight quarterly earnings decline, but the burger giant's stock rose modestly Tuesday on its latest assurance that beef safety fears are easing in Europe - its top international market.

Squeezed by weak foreign currencies and other concerns, McDonald's said it may close as many as 250 underperforming restaurants this quarter, primarily in emerging international markets. It stopped short, however, of trimming back an ambitious expansion plan that has it on pace to open 1,500 new restaurants worldwide this year.

The mad cow and foot-and-mouth disease scare that has jarred Europe in recent months continues to make many patrons there leery of beef, cutting into McDonald's sales and resulting in what chairman and chief executive Jack Greenberg acknowledged has been "a tough six months."

Net earnings for the second quarter were $440.9 million, or 34 cents a share, down from $525.9 million, or 39 cents a share, in the same period a year ago. That met the expectations of Wall Street analysts polled by Thomson Financial/First Call, which were lowered last month after McDonald's warned of another earnings shortfall.

Sales were $10.239 billion, up fractionally from $10.238 billion a year ago but only as a result of new restaurants and the recent acquisition of Boston Market. Sales declined 2 percent in Europe - which accounts for nearly a quarter of company sales - 0.8 percent in the United States and 4 percent in the Asia/Pacific region.

Nonetheless, investors were cheered by McDonald's statement, for at least the third time this year, that the worst of the European decline appears to be over. The company cited an increase the last four months in France, where the beef woes first surfaced last October, along with strong results in Britain, although sales were off at existing restaurants in Germany, its No. 1 European market.

McDonald's shares, which have lost more than 40 percent of their value since hitting an all-time high of $49.56 on Nov. 12, 1999, rose 62 cents to close at $28.39 on the New York Stock Exchange.

"The best thing about this quarter for McDonald's is that it's over," said Merrill Lynch analyst Peter Oakes, who foresees a turnaround late this year for the Oak Brook, Ill.-based company. "We're on the cusp of investors viewing McDonald's European results as having turned the mad-cow corner."

He called it "no big deal" that McDonald's plans to close up to 250 restaurants, or less than 1 percent of its worldwide total of 29,250, and said he doubted it signals a change in its long-term expansion strategy.

"It's just an opportune time for them to trim their portfolio," he said. The charge for costs of closing the restaurants, he noted, would be offset in the third quarter by an anticipated $130 million gain from the initial public offering of McDonald's stock in Japan, scheduled Thursday.

Company officials, who reaffirmed their expansion plans last month, avoided specific details of either their latest projections or where they are considering shutdowns in a conference call with analysts. They said improvement is coming in part because of unfavorable first-half comparisons with last year, when sales benefited from its popular promotion of Teenie Beanie Babies as Happy Meals toys.

"We are hopeful that the worst is behind us and Europe's results will continue to improve," Greenberg said.

More than 100 people have died in Britain and other European countries from the recent outbreak of Creutzfeldt-Jakob disease - the human form of mad cow disease, or bovine spongiform encephalopathy. Scientists believe people get the fatal illness by eating infected beef; no safety problems with McDonald's beef have been found.

Dendra Lambert, an analyst for Hilliard and Lyons, said a full McDonald's recovery from the beef scare still doesn't appear likely until next year.

For the first six months of 2001, net income was $819.2 million, or 62 cents a share, down 16 percent from $976.8 million, or 71 cents a share. Sales were $19.89 billion, up 1 percent from $19.74 billion.

In addition to more than 28,000 McDonald's restaurants, the company owns about 1,000 Boston Markets, Donatos Pizzas and Chipotle Mexican Grills.

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