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Unhappy Meal: McDonald's Serves Up Big Charge With Its Loss

Diane Hess

The first-ever quarterly loss for McDonald's (MCD - Cramer's Take - Stockpickr) was much bigger than expected because of a huge charge for restructuring operations. The fast-food giant also conceded that the days of its double-digit profit growth are behind it.

The restaurant operator said it lost $203.4 million, or 27 cents a share, in the fourth quarter, compared with earnings of $482.7 million, or 21 cents a share, in the year-ago period. It took a charge of $810.2 million, or 52 cents a share, as it exited businesses in certain markets and closed low-volume stores.

In December, McDonald's forecast a narrower fourth-quarter net loss of 5 cents to 6 cents a share and a smaller charge of around $400 million, although it said there could be others. After the announcement, the restaurant operator said it decided to close an additional 517 stores and terminated a long-term technology project, resulting in a bigger charge.

In all, McDonald's shuttered 719 underperforming restaurants in the fourth quarter. The company said it plans to close at least 400 traditional and 200 satellite stores this year.

Before items, McDonald's earned 25 cents a share, in line with its previously lowered guidance of 25 cents to 26 cents a share and analysts' reduced estimates, according to Thomson Financial/First Call.

"We had very low expectations," said Allan Hickok, an analyst at U.S. Bancorp Piper Jaffray.

Revenue grew 2% to $3.9 billion in the fourth quarter, while systemwide sales -- which have been an area of weakness for the company over the past several quarters -- were up 2% to $10.5 billion.

"Our first priority is to fix our existing business and, in doing so, rebuild our foundation for profitable growth," said chief executive Jim Cantalupo, who took over last month, in a statement.

Cantalupo added that given the size of McDonald's, "a 10% to 15% earnings-per-share growth target is not realistic." He said the company would seek "reasonable growth" that creates "shareholder value."

For years, McDonald's has kept a 10% to 15% growth goal, despite recently falling well short of those levels. "They haven't been growing anywhere near there," said Hickok. "At least they're no longer in denial."

Other analysts applauded the move. "It is a positive to see that McDonald's has scrapped plans calling for 10% to 15% growth annually," said Mark Kalinowski, an analyst at Salomon Smith Barney, in a research note. "We are happy to see management is taking a more realistic look at earnings potential."

Kalinowski trimmed his long-term growth forecast for McDonald's to 7% from 10%. He has an underperform rating on the stock. Salomon Smith Barney has a banking relationship with the company.

Analysts have roundly criticized the company's perception of itself as a growth business. "Perhaps they are moving toward the realization that they cannot grow as much anymore," said Hickok.

On the company's earnings conference call, Cantalupo said, in reference to a question last week about how he views the company, that McDonald's is not a "cash cow." But he said it is not a "gazelle" either.

"We are somewhere in the middle," Cantalupo said. The CEO added that he aims to build growth by improving sales at existing restaurants and by prudently adding new restaurants. McDonald's plans to open 1,230 new stores this year, slightly fewer than last year. It also plans to remodel 200 restaurants.

Cantalupo plans to take a "hard look" at reducing the company's capital spending budget, which is estimated at $1.9 billion for 2003. "We will only invest capital where it makes good sense," he said. The company's plans would reduce investments in Asia and Latin America, where economies are weak.

McDonald's said it would not buy back stock for at least the first half of the year, adding that the company may end up paying down some of its debt, which has come under review by credit agencies.

The fast-food giant reiterated a commitment to its dollar menu, but said it is not "married" to any item on it. McDonald's is evaluating whether or not its Big 'N Tasty hamburger belongs on the menu.

"The Big 'N Tasty has brought in a lot of customers who would not have otherwise visited us," said Mary Healy, head of investor relations, on the call. "But we have also seen a small drop in sales of some of our signature sandwiches. We need to find a way to prevent people from trading down."

Looking ahead, McDonald's is cautious in its outlook for comparable sales until it sees an improvement in key markets. Last week, the company said it would not give specific forecasts for 2003.

Shares were lately down 45 cents, or 2.9%, at $14.91. They are off more than 50% since last May.