Mad Cow Scare Trims McDonald's Take

A McDonalds restaurant is open for business in Fleet Street, central London, Sunday March 24 1996. Mad cow.
Europeans' wariness of beef during a mad cow disease scare combined with a weak euro to send McDonald's otherwise healthy quarterly profits lower for the first time since 1998.

Shares in McDonald's Corp. fell 6 percent on the unexpected earnings dip and on its chief executive's warning of a "very challenging" quarter ahead due in part to beef fears in Europe, where McDonald's has nearly 5,500 restaurants.

Jack Greenberg acknowledged that the scare is "having some impact in certain markets," primarily Germany, Spain, Italy and France, where it first surfaced in October.

Results from the current quarter will be shadowed by "continuing consumer confidence issues about European beef," Greenberg said.

The beef flap didn't stop the world's largest restaurant company from posting strong sales and earnings, but it was enough to snap its 2 1/2-year streak of increasingly higher profits.

Net earnings were $452 million, or 34 cents a share, down from $486.2 million, or 35 cents a share, a year earlier. Per-share earnings were also a penny below what analysts surveyed by First Call/Thomson Financial had estimated.

Worldwide sales rose 2 percent to $9.92 billion from $9.75 billion despite a 9 percent falloff in Europe, where the restaurant chain has been rapidly expanding. The company said that excluding the weakening of the euro and other currencies, European revenues would have been up 5 percent.

Operating income in Europe dropped 17 percent, from $322.3 million to $267.3 million, and was off 3 percent even when taking into account the stronger dollar, the company said.

Latin America was the weakest spot internationally for McDonald's, which said operating profit for the region fell 57 percent to $14.5 million. The company cited difficult economic conditions stemming from the 1999 devaluation in Brazil. Australian results, too, suffered from the goods and services tax introduced last July.

McDonald's executives also said in a conference call that they intend to cut back on the number of new outlets planned this year for Japan, citing slowing growth, and increase the number in China, where it will now open 100 restaurants a year.

The company's stock slid $2.06 to $30.81 a share on the New York Stock Exchange. It had been recovering since hitting a two-year low of $26.37 in September.

"The first quarter is going to be pretty rough," said Damon Brundage, an analyst for Raymond James and Associates. "Their international profit margins (in the fourth quarter) were down across the board - significantly in Europe because of mad cow."

But the Oak Brook, Ill.-based company is likely to have seen the worst of the European beef slowdown by spring, he said.

"Historically they have recovered from these mad cow scares pretty quickly. And they're adding other, non-beef products to mad cow-proof their menu," Brundage said.

Greenberg stressed that chicken and pork items are being added to he menu in its European restaurants and expressed confidence that sales there will continue to grow.

McDonald's sales in the United States, where growth has been sluggish in a heavily competitive market, rose 3 percent to $4.82 billion. Operating income in the United States rose 14 percent in the quarter, which McDonald's attributed in part to lower expenses.

After installing a customized cooking system in all its U.S. restaurants, McDonald's is adding products more rapidly than in the past. On Sunday it launched a rotating menu of new items nationwide.

"They're clearly doing something right in the U.S.," analyst Brundage said.

Keeping to its ambitious expansion pace, McDonald's said it plans to add about 1,700 restaurants in 2001, including about 1,600 McDonald's restaurants. It had 28,707 restaurants worldwide at year's end, including 12,804 in the United States.

The company's other restaurants are Aroma Cafe, Boston Market, Chipotle Mexican Grill and Donatos Pizza.

McDonald's net income for the year was $1.98 billion, or $1.46 a share, up 2 percent from $1.95 billion, or $1.39 a share in 1999.

Full-year sales climbed 4 percent to $40.2 billion from $38.5 billion in 1999, partly reflecting 1,606 new McDonald's restaurants - 517 in Europe.

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