Despite tougher sales comparisons in 2004, hamburger giant
is fired up about the second year of its turnaround plan. Investors are waiting to be impressed.
On a conference call, the company said it would keep its focus on sales at existing restaurants, rather than opening new ones. "There is unfinished business to do," said McDonald's CEO Jim Cantalupo, adding that "fast, accurate, and friendly service" is going be the emphasis in 2004.
Cantalupo said he expects same-store sales growth to be positive this year in the U.S. and around the world. But he stopped short of predicting better year-over-year comparisons than in 2003.
After doubling off the $12.12 they touched March 12, 2003, McDonald's shares have been hovering in the $24-$25 range since November, even as the chain reported a string of double-digit same-store sales improvements. The shares were recently up 18 cents, or 0.7%, to $25.46 -- about 16.3 times next year's Thomson First Call consensus earnings estimate of $1.56 a share and 14.8 times the 2005 consensus of $1.72 a share.
The shares are less expensive on a valuation basis than rival
and currently trade closer to industry problem-child
, operator of Chili's. At a recent $40.34, Wendy's shares are valued at roughly 17.8 times next year's estimate of $2.27 a share and 15.6 times 2005's forecast of $2.58 a share. Meanwhile, at $35.37, Brinker shares get 16.7 times 2004 estimates and 14.8 times 2005 estimates.
After reporting its first-ever loss a year ago, McDonald's announced earnings of $125.7 million, or 10 cents a share, in the fourth quarter of 2003. It reported revenue of $4.56 billion, up 17% from last year.
The company recorded $323.2 million in charges in the fourth quarter to exit partner brands and for goodwill in Latin America. "I don't like charges, but the decisions that led to them were right for the business," Cantalupo said, adding that he does not expect any major writedowns this year.
Meanwhile, Cantalupo said the two partner brands left, Chipotle and Boston Market, should be profitable in 2004. The company also plans to open 100 new Chipotle restaurants this year.
In all, McDonald's said it would set aside $1.5 billion to $1.6 billion for capital spending, above analysts' estimates for last year and 2004, which will go toward remodeling 1,500 to 1,800 restaurants.
"We have to do something about restaurants that are more than 20 years old," the company said. "We think this is a level we can handle and do it right."
The fast-food chain also said it will rebuild 100 restaurants this year, compared to 70 last year. "We rebuild if we get a sales lift of over $300,000," executives said on the call.
As for commodities, the company said beef costs would be up 5% this year, in line with previous expectations, even after the Mad Cow discovery led some to believe they would be lower.
Longer term, McDonald's said it continues to target 3% to 5% annual systemwide sales growth, 6% to 7% earnings growth, and a high-teen return on capital investment, looking to 2005 and beyond.