Industry News | November 17, 2000
McDonald's Reports Global Results
* Diluted net income per common share was 41 cents for the quarter, an increase of 5%; 10% in constant currencies. For the nine months, diluted net income per common share increased 8%; 12% in constant currencies.
* Systemwide sales increased 8% for the quarter and 7% for the nine months in constant currencies.
* Revenues increased 13% for the quarter and 12% for the nine months in constant currencies.
* For the quarter, Europe's operating income increased 10% and sales increased 13% in constant currencies. For the quarter, U.S. operating income increased 9% and sales increased 4%.
* The Company repurchased approximately $1.7 billion of stock during the nine months.
"McDonald's posted positive worldwide comparable sales in constant currencies for the nine months and quarter ending September 30, 2000," said Jack Greenberg. "Also, during the past 12 months we added 1,773 McDonald's restaurants and 727 restaurants operated by our other brands. This growth resulted in a Systemwide sales increase of 7 percent for the nine months and 8 percent for the quarter in constant currencies, further demonstrating that Brand McDonald's continues to be in demand by the 43 million customers we serve each day around the world. Recently, we welcomed American Samoa as the 120th country to raise the Golden Arches.
"Earnings per share grew 10 percent for the quarter and 12 percent for the nine months in constant currencies.
"Moving forward, we will pursue additional growth by intensifying our focus on building sales at existing restaurants. We'll do this by developing our people and delivering fresh, great-tasting food and outstanding Quality, Service, Cleanliness and Value. In addition, we'll extend Brand McDonald's and leverage our strengths to develop our other brands, which are reporting good results at the restaurant level. And we plan to continue to add about five McDonald's restaurants each day as these new restaurants are posting strong initial results and returns.
"Finally, we believe share repurchase is the best use of our free cash flow and credit capacity. Taking advantage of our low stock price, we bought about $426 million of common stock in the third quarter. This brought year-to-date purchases to nearly $1.7 billion and the cumulative purchases under our $4.5 billion, three-year share repurchase program to $2.9 billion, or 82.4 million shares.''
"Europe posted strong sales for the quarter," said Jim Cantalupo, vice chairman and president of McDonald's. "And, while the Euro continues to greatly reduce our reported results, the actual economic impact on our business is much less than for many other global businesses. This is because we source most of our food and paper locally, reinvest our profits back into the local markets, and finance our long-term growth in local currencies. Weak consumer spending in many Asia/Pacific and Latin America markets continues to negatively affect our business. In contrast, China and Mexico continued to deliver impressive performance on top of strong results a year ago. Canada also continued to post robust sales, driven by a focus on food taste, value and service.''
"Our sales showed increased momentum throughout the third quarter," comments Alan Feldman, president of McDonald's USA. "Early signs indicate our Brand Reinvention initiatives are growing our core business. These initiatives include freshening the look of our restaurants, developing our people, enhancing drive-thru service, providing everyday local value and introducing new tastes and variety to meet our customers' changing tastes. Customer perception scores for food taste, freshness and appearance are trending positively from coast to coast. And our new advertising campaign, 'We love to see you smile!' has resonated with consumers. According to a recent independent poll, key consumer targets view the campaign favorably and rate it highly for effectiveness.''
McDonald's operates primarily in the quick-service hamburger restaurant business. In addition, the Company operates other restaurant concepts: Aroma Cafe, Boston Market, Chipotle Mexican Grill and Donatos Pizza. Collectively these four businesses are referred to as "Other Brands.'' Throughout this release, Other Brands' financial information is included in the Other segment, except where specifically noted.
Impact of Foreign Currencies on Reported Results
While changing foreign currencies affect reported results, McDonald's lessens exposures, where practical, by financing in local currencies, hedging certain foreign-denominated cash flows and by purchasing goods and services in local currencies.
The primary currencies negatively affecting reported results for the quarter and nine months were the Euro, which is the currency in 11 of our European markets including France and Germany, the Australian Dollar and the British Pound. This negative effect was partly offset by the stronger Japanese Yen in both periods.
Systemwide Sales and Revenues
Systemwide sales represent sales by Company-operated, franchised and affiliated restaurants. Total revenues include sales by Company- operated restaurants and fees from restaurants operated by franchisees and affiliates. These fees include rent, service fees and royalties that are based on a percent of sales, with specified minimum payments along with initial fees.
On a global basis, the increases in sales and revenues for both periods were due to expansion and positive comparable sales. Foreign currency translation had a negative effect on the growth rates for both Systemwide sales and revenues for the quarter and nine months. The stronger Japanese Yen had a greater positive currency translation effect on sales compared with revenues. This is due to our affiliate structure in Japan. Under this structure, we record a royalty in revenues based on a percentage of Japan's sales, whereas all of Japan's sales are included in Systemwide sales. For this reason, sales were less negatively affected by foreign currency translation than were revenues.
On a constant currency basis, revenues increased at a higher rate than sales in both periods primarily due to the addition of Other Brands and the consolidation of Argentina and Indonesia, for financial reporting purposes, beginning in first quarter 2000.
U.S. sales increased four percent for the quarter and three percent for the nine months due to expansion and positive comparable sales. The positive comparable sales for the quarter were driven by local market initiatives and "McDonald's Taste Trials'' promotion associated with the 2000 Olympics.
In Europe, expansion and positive comparable sales drove the constant currency sales increases for the quarter and the nine months. This segment benefited from strong performances in France, the Netherlands and Spain for both periods and Germany for the quarter. Italy and the United Kingdom also contributed significantly to the increases for both periods.
In Asia/Pacific and Latin America, the constant currency sales increases were driven by expansion, partly offset by negative comparable sales for the quarter and nine months. Weak consumer spending continued to negatively affect many markets in these segments. However, China and Mexico posted strong positive comparable sales in both periods.
In the Other segment, the increases were primarily driven by the addition of Other Brands, as well as positive comparable sales and expansion in Canada and South Africa for both periods.
Combined operating margin dollars increased $3.1 million for the quarter and $48.1 million for the nine months. In constant currencies, combined operating margin dollars increased by $59.9 million for the quarter and $180.6 million for the nine months; a growth rate of five percent in both periods. The U.S. and Europe segments accounted for over 80 percent of the combined margin dollars in both periods.
As a percent of sales, consolidated Company-operated margins decreased for the quarter and nine months. Food & paper costs and occupancy & other operating expenses increased as a percent of sales for both periods, while payroll costs as a percent of sales were flat for the quarter and decreased slightly for the nine months.
Company-operated margins also decreased as a percent of sales for the quarter and nine months for each segment. In the U.S., payroll costs as a percent of sales increased for both periods. As a percent of sales, food & paper costs increased for the quarter and decreased for the nine months, while occupancy & other operating expenses decreased for the quarter and increased for the nine months.
Europe's Company-operated margin decrease for the quarter was primarily due to higher food & paper costs as a percent of sales, partly offset by lower payroll costs. For the nine months, Europe's decrease was primarily due to higher payroll costs and occupancy & other operating expenses as a percent of sales. In both periods, Latin America's decreases were partly offset by the consolidation of Argentina.
Franchised margins as a percent of applicable revenues decreased for the quarter and nine months. The decrease in the margin as a percent of revenues was primarily due to higher occupancy costs as a result of our strategy to lease more sites. By leasing a higher proportion of new sites, we have reduced initial capital requirements. However, as anticipated, this practice reduces franchised margins because the financing costs implicit in the lease are included in occupancy expense, whereas for owned sites, financing costs are reflected in interest expense.
Higher occupancy costs negatively impacted franchised margins in all segments for both periods. Additionally, the consolidation of Argentina and Indonesia contributed to the decline in margins as a percent of revenues in Latin America and Asia/Pacific, respectively, for both periods.
Selling, General & Administrative Expenses
Selling, general & administrative expenses increased 11 percent for the quarter and 10 percent for the nine months. The increases were primarily due to spending to support the development of Other Brands and the consolidation of Argentina and Indonesia. Excluding Other Brands and the consolidations, selling, general & administrative expenses increased two percent for the quarter and three percent for the nine months.
Other Operating Income and Expense
Other operating income and expense consists of transactions related to franchising and the food service business. Equity in earnings of unconsolidated affiliates decreased for the nine months primarily as a result of a gain reported in 1999 on the sale of real estate in a U.S. partnership. The decrease in other expense for the quarter and nine months was primarily due to lower provisions for property dispositions, higher gains on sales of excess property, costs in 1999 associated with the implementation of our Made For You food preparation system and the write-off of software in second quarter 1999.
Consolidated operating income increased $3.1 million for the quarter and, in constant currencies, $47.2 million, or five percent. For the nine months, consolidated operating income increased $52.9 million and, in constant currencies, $149.2 million or six percent. The constant currency increases for both periods were due to higher combined operating margin dollars and higher other operating income, partly offset by higher selling, general & administrative expenses. Operating income by segment includes the allocation of corporate selling, general & administrative expenses.
U.S. operating income increased $36.6 million, or nine percent, for the quarter and $81.0 million, or seven percent, for the nine months. The increases for both periods were driven by higher combined operating margin dollars and higher other operating income. Selling, general, and administrative expenses increased slightly for the quarter and were relatively flat for the nine months.
Europe's operating income increased 10 percent for the quarter and nine percent for the nine months in constant currencies. Strong results in France, Italy and Spain drove this segment's performance in both periods. Germany's strong performance for the quarter also contributed significantly to the increase.
Operating income in Asia/Pacific was flat for the quarter and increased eight percent for the nine months in constant currencies. This segment benefited in both periods from strong performances in China and South Korea, while Australia's drop in retail spending had a significant negative impact on results. The partial sale of our Japanese affiliate's ownership in Toys 'R' Us Japan, in connection with an initial public offering of Toys 'R' Us Japan, contributed to the increase for the nine months.
Latin America's operating income decreased 20 percent for the quarter and 11 percent for the nine months in constant currencies. Both periods were negatively impacted by the continuing difficult economic conditions experienced by most markets in the region. Strong performance in Mexico, as well as the consolidation of Argentina, partly offset the decreases in both periods.
In the Other segment, strong performance in Canada was offset by the investment spending for Other Brands for the quarter and nine months.
Interest, Nonoperating Expense and Income Taxes
For both periods, higher interest expense was primarily due to higher average debt levels, partly offset by weaker foreign currencies. The higher average debt levels were a result of the Company using its available credit capacity to fund share repurchases.
Nonoperating (income) expense for the quarter reflected translation gains in 2000 compared with translation losses in 1999 and lower minority interest expense. For the nine months, nonoperating (income) expense also reflected lower minority interest expense as well as lower translation losses and a gain related to the sale of a partial ownership interest in a majority-owned subsidiary outside the U.S.
The third quarter effective income tax rate was 30.5 percent compared with 32.4 percent in 1999. The effective tax rate for the nine months was 31.4 percent compared with 32.8 percent in 1999. The decrease in the income tax rate was the result of a tax benefit resulting from an international transaction. For the full year, the tax rate is expected to be about 31.4 percent.
Weighted Average Shares
Weighted average shares outstanding for the third quarter and nine months were lower compared with the prior year due to shares repurchased. In addition, outstanding stock options had a less dilutive effect than in the prior year. The Company repurchased $426 million or 12.3 million shares of its common stock in the third quarter, bringing the total for the first nine months of 2000 to 48.0 million shares for approximately $1.7 billion.
Third Quarter Conference Call
In conjunction with its Third Quarter earnings release, McDonald's Corporation will broadcast its conference call live over the Internet on Thursday, October 19, 2000 at 12:00 noon, CDT with members of its management team. Interested parties are invited to listen by logging on to http://www.mcdonalds.com/corporate/investor and clicking the "Investor Webcast'' bullet under "Latest News''.
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