Struggling Fast-Food Giant Cites Disappointing Sales

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CHICAGO ( -- McDonald's Corp. today lowered its 2002 earnings forecasts to $1.31 per share, from $1.43 per share, on disappointing third-quarter sales in the U.S. and Europe and lower fourth-quarter sales expectations. The company already has posted earnings declines over the past six quarters.

"The past couple of years haven't been easy for us as McDonald's investors," said Jack Greenberg, chairman-CEO, during the company's conference call today with analysts. Mr. Greenberg acknowledged the results fall below both the company's and Wall Street's expectations.

U.S. sales were relatively flat for the first two months of the third quarter, which implies a same-store sales decline of 2% to 3%, according to analysts. McDonald's shares fell by nearly 13% to $18.96 in late-day trading, far below its 52-week high of $30.72.

Plans accelerated
Mr. Greenberg said

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increased competition and disappointing results prompted the chain to accelerate its plans to give customers "better value, service, menu choice and experience." That agenda to launch a national value menu and to remodel and rebuild stores was approved by franchisees last week. The CEO was bullish that the plan would be "difficult for the competition to match," but cautioned it would "take time before we see the full benefit of these initiatives in our earnings."

McDonald's said it plans to invest $300 million to $400 million into existing U.S. franchised restaurants on a case-by-case, return-on-investment basis during the coming 18 to 24 months. The company will pay for the effort by cutting back on global restaurant openings and by trimming its share repurchase program to $500 million in 2003 from $1 billion last year.

Menu improvements
From a marketing perspective, Mike Roberts, president of McDonald's USA, outlined menu improvements for the coming year to include a large bacon burger, improved premium salads, additional flatbread items and the national launch of McGriddles, a sausage and pancake breakfast sandwich.

"We're going to act as one brand and leverage the incredible marketing power of one brand and one voice," Mr. Roberts said.

McDonald's expects to spend $20 million for national TV, radio and print advertising and in-store displays during the fourth quarter to support its national value platform. Executives offered no specifics on the spending for the 2003 calendar, other than to say it would rise based in "increased contributions." One executive with knowledge of the program earlier told Advertising Age that the company would spend $40 million over the next six months to support the value effort.

To boost anemic sales in Europe, the company will adjust its value and menu offerings there as well, including launching a new steak sandwich, a Disney Happy Meal and a promotion called "Pop Rivals" that includes a text-messaging game.

Disputed reports
Mr. Greenberg disputed reports that McDonald's executives at the recent Las Vegas meeting to gain franchisee support for the so-called U.S. Agenda boasted that they would put $1 billion behind the two-year rebuilding and remodeling program. However, when pressed by analysts today for details behind the $300 million to $400 million the company said it would spend, executives were vague, saying plans hadn't been finalized.

Analysts so far have been unimpressed with the proposed growth initiatives.

"Having a better-looking building does nothing to fix rude service, slow service or inaccurate order fulfillment," said Mark Kalinowski, restaurant analyst with Salomon Smith Barney, in a research note. "McDonald's needs to prioritize its initiatives better -- giving much more weight to fixing what its customers complain about most."

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CORRECTION: An earlier version of this story incorrectly reported McDonald's dropped its forecasted earnings per share for 2002 to $1.31 from $1.25. Its 2001 earnings per share was $1.25.

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