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Sales boost McDonald's to modest profits

McDonald's Corp. posted a fourth-quarter profit on Monday, compared with its first-ever loss a year earlier, but earnings were held back by costs associated with scaling back its non-hamburger brands.
/ Source: Reuters

McDonald's Corp. posted a fourth-quarter profit on Monday, compared with its first-ever loss a year earlier, but earnings were held back by costs associated with scaling back its non-hamburger brands.

Robust U.S. sales were boosted by a renewed focus on existing hamburger restaurants, as McDonald's took charges for selling off its Donatos Pizza chain and closing some Boston Market chicken restaurants.

McDonald's, the world's largest restaurant company, said it earned $125.7 million, or 10 cents a share, in the quarter, compared with a net loss of $343.8 million, or 27 cents a share, a year earlier. The figures were in line with a prior forecast from the company.

Quarterly revenue rose 17 percent to $4.56 billion, even though the period included the first week after the discovery of mad cow disease in the United States. Revenue got a lift due to the weak U.S. dollar against strong foreign currencies such as the euro, McDonald's said.

Same-store sales, or those at restaurants open more than a year among the company's more than 30,000 worldwide hamburger restaurants, rose 7.4 percent.

McDonald's, based in Oak Brook, Illinois, backed its earlier outlook for 2005 and beyond, with expectations for revenue growth of 3 percent to 5 percent and operating income growth of 6 percent to 7 percent annually.

"The guidance and the momentum that they have is positive," said Doug Christopher, an analyst with Crowell Weedon, who rates McDonald's stock a "buy" and owns the company's shares. "For investors still on the sidelines waiting for evidence, I think the evidence is building."

The results marked a turnaround from the previous year's fourth quarter, when McDonald's posted its first-ever quarterly loss after cutting jobs and closing outlets, as sales deteriorated in the saturated U.S. fast-food market.

McDonald's quarterly sales increase was helped by the launch late in the year of a global advertising campaign, "I'm Lovin' It," and the introduction of new products such as all-white-meat Chicken McNuggets and McGriddles breakfast sandwiches in the United States.

U.S. same-store sales rose 12.5 percent in the quarter, evidence that the market has turned around, analysts said.

European same-store sales were up 2.1 percent, as strong performance in Russia and France offset weakness in Britain. The combined Asia, Middle East and Africa region posted a same-store sales gain of 1.9 percent, as improvement in Australia offset weak markets such as Taiwan and Hong Kong.

CEO bullish
In keeping with the focus on operational improvement at existing stores, McDonald's said it plans to spend more on refurbishing older restaurants this year.

Capital spending is targeted at $1.5 billion, said the company, which also intends to improve its financial standing by paying down $400 million to $700 million in debt. It will add 850 new McDonald's on top of some 830 last year.

"What we have right now is momentum," McDonald's Chief Executive Jim Cantalupo told Reuters in an interview. "We will continue to improve our execution, which I believe is very important."

He said the company expects same-store sales to be higher on a monthly basis compared with last year, as it unveils new products and keeps marketing strong. Analysts have worried that sales will become more challenging after the first quarter.

"Things start getting difficult in May of 04," said JMP Securities analyst Dean Haskell. "They're really going to have to hit the cover off the ball in terms of marketing to drive the stock price higher."

McDonald's took fourth-quarter charges against earnings of 25 cents a share for the costs of selling the Donatos Pizza chain, closing Donatos and Boston Market restaurants outside the United States, exiting a joint venture, and revitalizing its Japanese market. It also had goodwill and asset impairments in Latin America.

The company also said that Senior Chairman Fred Turner, the man behind such McDonald's mainstays as the Big Mac and Egg McMuffin, was retiring after 48 years with the company. Turner, 71, was one of McDonald's first employees. He worked closely with founder Ray Kroc, succeeded him as chief executive in 1973 and served in that post until 1987.

Shares of McDonald's closed 3 cents a share higher at $25.28 on the New York Stock Exchange, before it issued its results.