Industry News | July 24, 2001
McDonald's Reports Sales Results
* Systemwide sales increased 5% for the six months and 4% for the quarter in constant currencies.
* Sales increased in all segments for the six months: 2% in the U.S. and, in constant currencies, 10% in Latin America, 6% in Asia/Pacific and 3% in Europe.
* Revenues increased 9% for the six months and 8% for the quarter in constant currencies.
* Diluted net income per common share was 34 cents for the quarter, 35 cents in constant currencies.
* The Company repurchased $738 million of stock during the six months.
* Information in constant currencies excludes the effect of foreign currency translation on reported results, except for hyperinflationary economies, such as Russia, whose functional currency is the U.S. Dollar.
Chairman and chief executive officer Jack Greenberg said, "McDonald's reported earnings per share of 34 cents for the quarter, in line with guidance issued last month. In constant currencies, earnings per share was 35 cents; Systemwide sales increased 4%; and revenues increased 8%.
"While these results are below trendline, we are encouraged by improved performance in Europe, where we saw sequential improvement in comparable sales throughout the quarter. France led the segment with positive comparable sales for each of the past four months. We've seen progress, but there are still consumer concerns about the safety of the European beef supply in certain markets. Therefore, we continue to proactively communicate our very high safety and quality standards, as well as promote menu variety and value. We are hopeful that the worst is behind us and Europe's results will continue to improve.
"In the U.S., we faced tough comparisons with last year's Teenie Beanie Babies promotion, which was the fourth most successful Happy Meal in our history. Looking forward, we are excited about our New Tastes Menu and believe our renewed emphasis on food taste, variety and improving operations will drive customer visits and sales.
"Our Asia/Pacific segment delivered a 9% sales increase in constant currencies for the quarter, primarily due to expansion. McDonald's Japan, our largest market in this segment, will have an initial public offering (IPO) on July 26. After the IPO, McDonald's will retain 50% ownership in McDonald's Japan. Our partner, Den Fujita, and his family, will own approximately 26% and he will continue to actively manage the business. As a result of this transaction, McDonald's will record a gain of approximately $130 million in third quarter 2001, to reflect an increase in the carrying value of our investment, as a result of the cash proceeds from the IPO.
"While this has been a tough six months, we are intent upon improving the business by building comparable sales around the world through improved operations, effective marketing and menu development. And we continue to focus on controlling costs to improve profitability. To that end, we are in the process of reviewing approximately 250 underperforming restaurants for possible closing. These restaurants are primarily located in certain emerging markets. We expect this will result in charges to earnings in the second half of the year.
"We remain confident in our business fundamentals and expect to post significantly stronger results in the second half. Accordingly, our previously stated outlook, for relatively flat constant currency earnings per share for the year, remains the same.''
The company operates in the food service industry and primarily operates quick-service restaurant businesses under the McDonald's brand. To capture additional meal occasions, the Company also operates other restaurant concepts: Aroma Cafe, Boston Market, Chipotle Mexican Grill and Donatos Pizza. Collectively these four businesses are referred to as ``Partner Brands.'' In addition, McDonald's has a minority ownership in Pret A Manger.
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.
Reported results for the six months and quarter were negatively affected by foreign currency translation primarily due to the weaker Euro, British Pound, Japanese Yen, Australian Dollar and the Brazilian Real.
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 the six months and quarter were primarily due to restaurant expansion and the acquisition of Boston Market in the second quarter 2000, partly offset by negative comparable sales. Foreign currency translation had a negative effect on the growth rates for both Systemwide sales and revenues for the six months and quarter. On a constant currency basis, revenues increased at a higher rate than sales for both periods primarily due to the acquisition of Boston Market restaurants, which are all Company-operated, and an increase in the royalty percent received from our Japanese affiliate, effective January 1, 2001.
U.S. sales increased 2% for the six months and were flat for the quarter. The growth for the six months was due to expansion, partly offset by negative comparable sales. Both periods were negatively impacted by the difficult comparison with the successful June 2000 Teenie Beanie Babies promotion.
In Europe, Asia/Pacific and Latin America, constant currency sales increased for the six months and quarter due to expansion, partly offset by negative comparable sales.
In Europe, France and the U.K. were primary contributors to the sales growth for the quarter and six months. Also, the Netherlands and Russia delivered strong performances in both periods. Comparable sales continued to be affected by consumer confidence issues regarding the European beef supply in certain markets. Sales trends are improving in several markets, most notably France, which had positive comparable sales in each month from March through June. We expect the impact from the concerns regarding European beef will continue to lessen as the year progresses.
In Asia/Pacific, the six months and quarter benefited from positive comparable sales in China and strong results in several Southeast Asia markets. Japan also contributed significantly to the increases for both periods. Weak consumer spending in Australia, partly due to the goods and services tax introduced in July 2000, continued to negatively impact sales growth. As we pass the anniversary of the introduction of the tax, our comparisons become easier; however, consumer spending remains weak in Australia.
In Latin America, expansion and positive comparable sales in Mexico for the six months and quarter and in Brazil for the six months were the primary contributors to the sales increases. Weak consumer spending continued to negatively affect most markets in this segment.
In the Other segment, the increases for the six months and quarter were primarily driven by Canada and the Partner Brands.
The following combined operating margin information represents margins for McDonald's restaurant business only.
In constant currencies, combined operating margin dollars decreased by $25.4 million for the six months and $12.4 million for the quarter; a 1% decline for both periods. The U.S. and Europe segments accounted for over 80% of the combined margin dollars in both periods.
As a percent of sales, consolidated Company-operated margins decreased for the six months and quarter. Food & paper costs, payroll costs and occupancy & other operating expenses all increased as a percent of sales for both periods.
In the U.S., Company-operated margins decreased as a percent of sales for both periods. As a percent of sales, food & paper costs decreased while payroll costs increased for both periods. Occupancy & other operating expenses were flat for the six months and increased for the quarter.
In each of the remaining segments, Company-operated margins decreased as a percent of sales for both periods. In Europe and Latin America, the decline was primarily due to negative comparable sales and higher food costs. In addition, Europe experienced higher labor costs. Asia/Pacific's Company-operated margin percent decreased primarily due to negative comparable sales and higher labor costs for the six months and higher food & paper costs and occupancy & other operating expenses for the quarter.
Franchised margins as a percent of applicable revenues in the U.S., Europe and Latin America decreased for the six months and quarter, partly due to negative comparable sales for both periods. In addition, the decreases in Europe for the six months and Latin America for both periods were partly due to temporary rent assistance provided to franchisees in certain markets. The franchised margin percent in Asia/Pacific increased for both periods primarily due to an increase in the royalty percent received from our Japanese affiliate.
Franchised margins as a percent of revenues in all segments were also negatively impacted by 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.
Selling, general & administrative expenses increased 5% for the six months and quarter. The increases were primarily due to the acquisition of Boston Market and increased spending on future store technology improvements, partly offset by weaker foreign currencies. Excluding Partner Brands, selling, general & administrative expenses increased 2% for the six months and 3% for the quarter.
Equity in earnings of unconsolidated affiliates decreased for both periods, primarily due to the increase in Japan's royalty expense and a weaker Japanese Yen and, for the six months, weaker results in Japan. Although the increase in royalty expense reduced McDonald's equity in earnings for Japan, it was more than offset by the royalty benefit McDonald's received in franchised revenues. Other expense for the second quarter included a $24 million asset impairment charge in Turkey due to our assessment of the ongoing impact of significant currency devaluation on our business. For the six months, other expense also included the write-off of certain technology costs and a gain on the sale of real estate in Singapore.
Consolidated operating income decreased $113.3 million, or 7%, for the six months and $70.2 million, or 8%, for the quarter, in constant currencies. The decreases for both periods were due to lower combined operating margin dollars, lower other operating income and higher selling, general & administrative expenses, partly due to the acquisition of Boston Market.
U.S. operating income increased $7.6 million, or 1%, for the six months, while decreasing $6.4 million, or 1%, for the quarter. The increase for the six months was due to higher combined operating margin dollars and other operating income, partly offset by higher selling, general & administrative expenses. The decrease for the quarter was mainly due to lower combined operating margin dollars and higher selling, general & administrative expenses, partly offset by higher other operating income.
Europe's operating income decreased 9% for the six months and 5% for the quarter in constant currencies. Driving this segment's improved performance over the first quarter was significant improvement in France's results, as well as strong results in the Netherlands and Russia. However, operating income continued to be negatively affected by the decline in consumer confidence regarding the safety of the European beef supply in certain markets.
Operating income in Asia/Pacific increased 5% for the six months and 2% for the quarter in constant currencies. In both periods, this segment benefited from a strong performance in China and an increase in the royalty percent received from Japan. In addition, a gain on the sale of real estate in Singapore contributed significantly to the increase for the six months.
Latin America's operating income decreased 32% for the six months and 37% for the quarter in constant currencies. Both periods were negatively impacted by the continuing difficult economic conditions experienced by most markets in the region.
In the Other segment, the results for both periods were impacted by the asset impairment charge in Turkey, driven by the recent currency devaluation.
For both periods, higher interest expense was primarily due to higher average debt levels, partly offset by lower average interest rates and weaker foreign currencies. The higher average debt levels were a result of the Company using its available credit capacity to repurchase shares of its common stock.
Nonoperating (income) expense for the six months included lower foreign currency translation losses, while the quarter included lower foreign currency translation gains. In addition, nonoperating expense included the first quarter write-off of a financing receivable from a Latin American supplier and minority interest expense related to the sale of real estate in Singapore. Also, second quarter 2000 included a gain related to the sale of a partial ownership interest in a majority- owned subsidiary outside the U.S.
The effective income tax rate was 32.3% and 32.6% for the six months and quarter 2001, respectively. The 2000 effective tax rate was 32.0% for both periods. The increase in the income tax rate in 2001 was primarily the result of the Turkey asset impairment charge, which could not be tax-effected for financial reporting purposes.
Weighted average shares outstanding for the six months and quarter 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. During the first six months of 2001, the Company repurchased 24.4 million shares of its common stock for approximately $738 million.
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