Meat Industry INSIGHTS Newsletter

970752 McDonald's Profits Up, Though 1997 Income is Below Expectations

July 17, 1997

McDonald's Corp. reported higher second-quarter revenues and profits Thursday, but the fast-food giant said its U.S. operating income this year will fall short of its long-term growth target.

McDonald's said net income rose 4 percent in the quarter, to $438.2 million, from $420.4 million a year ago. Earnings per share rose to 63 cents, in line with Wall Street expectations and up from 59 cents a share a year ago.

Systemwide sales in the quarter rose 7 percent to $8.5 billion from $7.9 billion a year ago.

While McDonald's remains on track for record net earnings for the full year, the company does not expect its U.S. operating income will meet its long-term growth target of mid-single-digit percentage growth in 1997.

"We're not on track with that for this year," McDonald's Chief Financial Officer Michael Conley said in an interview.

McDonald's, which has said 1997 is a "transition year" for its domestic business, last week announced sweeping changes in its U.S. management line-up. The changes are part of its move to decentralize its U.S. operations to bring decision-making closer to the restaurant level.

The reorganization followed the company's decision in May to cancel its Campaign 55 lunch and dinner promotion amid disappointing sales. The promotion, which featured hamburgers for 55 cents when customers also bought a drink and french fries, had been criticized by some franchisees, who said it did not build sales and hurt profit margins.

But other promotions, including the Teeny Beanie Baby toy giveaway, special prices for its Chicken McNuggets and promotions based on the Monopoly board game, have been successful thus far this year, Conley said.

McDonald's latest promotion -- a tie-in with the "George of the Jungle" live action movie -- begins Friday. That promotion includes two Quarter Pounder hamburgers or two Sausage McMuffin with Egg breakfast sandwiches for $2.

"As we go into the summer, we've got some momentum going for us with the 'Hercules' (movie tie-in) promotion and the 99-cent triple cheeseburger," Conley said.

McDonald's also announced plans to open 2,400 new restaurants this year, 80 percent of them overseas. The new restaurant plan is at the low end of the range for the year, which had previously been set at between 2,400 and 2,800, with more than 70 percent overseas.

"Based on input from local management, we have refined our plans and expect to add about 2,400 restaurants globally in 1997, with a greater emphasis on full-size traditional restaurants compared with 1996," Chairman Michael Quinlan said in a statement.

He added that plans for restaurant openings will be evaluated as the year progresses.

McDonald's operates nearly 22,000 restaurants worldwide, including more than 12,000 in the United States.

In the second quarter, international earnings helped bolster McDonald's second-quarter results, offsetting a decline in U.S. operating income.

International operating income in the second quarter gained 10 percent, to $416.8 million, while U.S. operating income declined 2 percent, to $340.2 million.

"We operate about twice the number of restaurants outside the U.S. as our next largest globally branded competitor," James Cantalupo, chief executive officer-international, said in a statement. "We intend to build from this strong position to capture an even greater share of the under-penetrated, growing global market."

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