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McDonald’s to Post First Loss in 47 Years

December 17, 2002

CHICAGO (AP) _ McDonald’s Corp. warned Tuesday that the protracted sales slump that already has forced it to change CEOs and reverse expansion plans will result in the first quarterly loss in its 47-year history.

The announcement, which came 12 days after a management shakeup, sent shares in the burger giant tumbling to a nearly eight-year low.

It also confirmed that a price war with rival Burger King _ its first big discounting campaign since 1997 _ hasn’t paid off the way the company hoped after two years of wrestling with a crowded U.S. restaurant market, mad-cow disease scares overseas, marketing misfires and mounting service complaints.

McDonald’s said it expects to incur after-tax charges of at least $390 million in the fourth quarter to pay for the restructuring moves it announced last month, including closing underperforming restaurants and pulling out of several countries. That will result in a net loss of 5 cents to 6 cents per share.

Excluding the charges, the Oak Brook, Ill.-based chain expects earnings to be 25 cents to 26 cents per share _ well short of the 31-cent estimate of Wall Street analysts surveyed by Thomson First Call.

McDonald’s shares, which traded at nearly $50 three years ago and topped $30 as recently as June, sank $1.76 or 10 percent to $15.62 in afternoon trading on the New York Stock Exchange. That’s the lowest closing price, adjusting for a stock split, since Jan. 26, 1995.

McDonald’s revealed continuing weakness in its home market, saying sales at U.S. restaurants open at least a year were 1.3 percent lower in the first two months of the fourth quarter than in the comparable period a year ago. Through November, the same-store sales were down 1.5 percent.

``In the U.S., it has just gotten to the point where they can’t add any more stores because the (fast-food) market is so saturated,″ said Morningstar analyst Carl Sibilski. ``Now it’s a matter of how they make the hurdle from saturation to cost controls.″

But the slump goes well beyond McDonald’s back yard. Sales at established McDonald’s restaurants worldwide were down 1.6 percent for the quarter and down 2 percent for the first 11 months.

The company also said profit margins for the fourth quarter will be lower than a year ago.

Expenses related to selling, general purpose and administration are expected to rise 12 percent for the quarter due to increased spending on advertising and technology. McDonald’s has spent heavily in the quarter to promote its ``value menu″ of $1 items.

Analyst Douglas Christopher said McDonald’s has dabbled too much in new concepts and focused on growing sales through expansion while not spending enough time until recently on food quality, service and cleanliness. He also said its once-superior finances have become saddled with debt and other concerns.

``Management got off track. They need to get back to basics,″ said Christopher, of Los Angeles-based Crowell Weedon. ``Through a lack of execution, they’ve destroyed something that was so predictable and so consistent.″

Jim Cantalupo, the former company president who had retired earlier this year, was rehired Dec. 5 to take over from Jack Greenberg as the company’s fifth chairman and chief executive officer on Jan. 1. Greenberg, under fire for months from investors and analysts alike, retired unexpectedly.

``This has been a difficult year and our financial performance has been below expectations,″ said Matthew Paull, McDonald’s chief financial officer. ``Under the leadership of Jim Cantalupo, I am confident we will improve our business.″

The company did not conduct its usual conference call to discuss the fourth-quarter outlook. It said Cantalupo is ``aggressively reviewing all aspects of the business″ and will discuss his priorities in January.

Merrill Lynch analyst Peter Oakes said Cantalupo is likely to add more fourth-quarter charges to ``wipe the slate cleaner, particularly the international portfolio.″

Morningstar’s Sibilski agreed, saying ``They may as well get as much bad news in as they can, between CEOs.″ He said the company’s future still holds promise because of its international dominance and the recently begun makeover of many of its 13,300 U.S. restaurants.


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