McDonald's Rakes In the Weak Dollars

But earnings slip because of costs related to its restaurant-opening reduction.
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Updated from 9:24 a.m. EDT

McDonald's

(MCD) - Get Report

posted record revenue thanks to the weak dollar in its second quarter, but saw earnings slip because of costs associated with scaling back its new-store ambitions.

The hamburger chain earned $470.9 million, or 37 cents a share, in the latest quarter compared with earnings of $497.5 million, or 39 cents a share, last year. Total revenue rose 11% to $4.28 billion, while companywide revenue, which consolidates franchise sales, jumped 10% to $11.47 billion.

Analysts surveyed by Thomson First Call were forecasting earnings of 37 cents on total revenue of $4.41 billion. In constant currency, total revenue rose 5% and companywide revenue rose 4%. Same-restaurant sales rose 4.9% in the quarter over a year ago.

Shares were trading 8 cents higher, or 0.4%, at $21.34 in morning trading.

"There were no surprises. The weak dollar continued to work for them, capital spending is being cut and we'll definitely see higher dividends," said analyst Jack Russo at A.G. Edwards. "But U.S. sales are not sustainable at the current pace. The salads seem to be working, but next year will be tough."

The higher dividends would come from a stash of $500 million to $1 billion the company earmarked for share repurchases or dividend payouts, or both.

But analyst John Ivankoe at J.P. Morgan said he doesn't expect a dividend-rate increase beyond the current 1.1% yield, given that McDonald's already pays $300 million a year in dividends. The analyst also predicts the company will keep estimates unchanged in the near term since he does not see "sustainable U.S. momentum past the summer months."

Ivankoe is skeptical about the stock, too, giving it an underweight rating on concerns the shares already trade at 15.7 times and 14.9 times 2003 and 2004 earnings, respectively. That leaves "little room for expansion," he said.

Lana Lazarus, research analyst at U.S. Bancorp Piper Jaffray, also raised a few concerns. In a report, she wrote: "Risks include a worsening economy, same-store sales declines, cost pressures or weak consumer demand," which could limit McDonald's rise in sales and share price. But the analyst kept her market perform rating on the stock.

McDonald's opened a net 1,015 restaurants around the world in 2002, but expects to open just 360 in 2003, reflecting an ongoing management effort to trim costs and underperforming assets.

"We incurred additional costs this quarter due to our previously announced reduction in openings," the company said in a statement. "Yet, we remain on track to meet our capital spending and selling, general and administrative expense targets for the year."

The company didn't provide specific sales or earnings guidance for 2003, but noted comparable-restaurant sales fell 2.1% in 2002 and 1.3% in 2001 and said its 2003 strategies "are designed to reverse the negative comparable sales trend."

"Our outlook remains cautious until we see continued improved performance in our key markets. As a guideline, generally, one percentage point of comparable sales in the U.S. impacts annual earnings per share by 1.5 cents, and one percentage point of comparable sales in Europe impacts annual earnings per share by about one cent, assuming no change in profit margins."

The company is expected to earn $1.33 a share in 2003, according to Thomson First Call.