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News Fri, Nov 08, 2002

McDonald's to Close 175 Restaurants

Fri Nov 8,12:29 PM ET

By Deborah Cohen

(For more news about McD's downturn

Also see

http://news./fc?tmpl=fc & cid=34 & in=business & cat=downsizing_and_layof

fs )

 

CHICAGO (Reuters) - Fast-food giant McDonald's Corp. (NYSE:MCD - news) said

on Friday it would shutter about 175 restaurants -- its second major round

of closings in two years -- and slash up to 600 worldwide corporate

positions, as it struggles to turn around its U.S. performance and trim

worldwide costs.

 

The Oak Brook, Illinois-based company said the actions will reduce

fourth-quarter earnings by $350 million to $425 million, forcing its to miss

its 2002 earnings forecast. The shortfall stems from the combined effect of

the cost of closing stores and losing their revenues, a spokeswoman said.

 

McDonald's shares fell by as much as 13 percent on the New York Stock

Exchange (news - web sites) on Friday, and the news also pushed down the

stock of competitors such as hamburger rival Wendy's International Inc.

(NYSE:WEN - news) and Taco Bell parent Yum! Brands Inc. (NYSE:YUM - news)

 

The restructuring includes a planned exit from three undisclosed countries

where McDonald's already has operations. The overhaul is the latest attempt

by McDonald's Chief Executive Jack Greenberg, who has been at the helm for

four years, to take costs out of an operation that has struggled with weak

sales in the United States, with troubled economies in major markets such as

Latin America, and the impact of mad cow disease outbreaks in Europe and

Japan.

 

Wall Street questioned whether the actions, which come on the heels of seven

earnings shortfalls in the last eight quarters, go far enough.

 

" Clearly, they should have done this sooner, but it's better late than

never, " said Victory Capital Management analyst David Kolpak, whose firm

held 3.6 million McDonald's shares through June.

 

" Investors have been saying for some time that some of the developing market

businesses need to be trimmed back, that McDonald's ... on the basis of

over-optimistic forecasts, invested too quickly in some Latin American and

Middle Eastern markets, ahead of those economies' ability to support

demand, " he said.

 

A PERIOD OF RETRENCHMENT

 

With a history of driving growth through rapid expansion, McDonald's, which

operates nearly 30,000 restaurants worldwide, has been retrenching on store

openings. In 2003, the company plans to open about 600 hamburger outlets

worldwide, down from a high of 2,000 in 1996 and a planned 1,300 this year.

Last year it closed 163 underperforming stores.

 

The worldwide job cuts of 400 to 600 positions, including up to 250 in the

United States, mark the company's third major round of layoffs in five

years. Worldwide, McDonald's employs about 395,000 people, including

store-level jobs.

 

Shares of McDonald's were down $1.79 or 9.3 percent at $17.52 early Friday

afternoon, off an earlier low at $16.80. The stock had a delayed opening due

to an imbalance of orders.

 

Of late, McDonald's has returned to price-discounting in the United States,

an oft-criticized strategy in its largest market. Competition intensified

after the company in September introduced a menu of $1 items, prompting a

similar reaction from Burger King Corp., the No. 2 hamburger chain.

 

The effect of price cutting has been blamed for weakening the value of the

sale of Burger King by its parent, British drink conglomerate Diageo Plc.

(DGE.L)

 

" McDonald's may become even more aggressive in throwing its marketing muscle

around in 2003 than originally planned, as it tries to do whatever it can to

reverse the negative U.S. comps (comparable store sales), " wrote Salomon

Smith Barney analyst Mark Kalinowski.

 

In addition to the planned 2002 restaurant closures, McDonald's is also

changing its real estate structure in four Middle East and Latin American

countries, eliminating an ownership stake and any invested capital to cut

costs.

 

October systemwide sales at McDonald's totaled $3.5 billion, up 3 percent

before the impact of foreign currency. Comparable U.S. sales were down 0.6

percent, while those in Europe were off 2.2 percent.

 

The company first trimmed jobs at its headquarters operations in 1998. Last

year, it shed about 700 employees in Oak Brook and in its regional offices

as part of a domestic restructuring.

 

Wall Street had expected McDonald's to earn $1.40 to $1.43 a share in 2002,

with an average estimate at $1.43 a share, according to Thomson First Call.

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