Posted on: Friday, July 23, 2004

McDonald's lovin' its 2nd quarter

By Dave Carpenter
Associated Press

CHICAGO — Menu changes, later hours and accepting payment by credit and debit cards helped lift McDonald's Corp. to higher sales and a 25 percent jump in second-quarter profit.

The fast-food giant's results yesterday included a fourth straight quarter of double-digit sales increases, despite a tough comparison to strong 2003 results, and confirmed that the resurgence begun last year is continuing.

They also signaled a positive debut quarter under new chief executive Charlie Bell despite a turbulent spring in which then-CEO Jim Cantalupo died abruptly and Bell was diagnosed with colorectal cancer within days of succeeding him.

The strong second-quarter numbers "illustrated the strength of the company's turnaround momentum," Morningstar Inc. analyst Carl Sibilski said.

Net income for the second quarter was $590.7 million, or 47 cents per share, up from $470.9 million, or 37 cents per share, a year earlier. That matched Wall Street's upgraded expectations based on the company's preliminary earnings numbers released last week.

Revenues were $4.7 billion, up 10 percent from $4.3 billion for the second quarter of 2003, including a healthy 7.8 percent gain from restaurants open more than a year.

Bell, who took over after Cantalupo's death from an apparent heart attack April 19, noted that U.S. company-operated restaurants achieved their highest profit margins since 1994 — 19.5 percent.

Comparable sales growth in Europe — McDonald's No. 2 market — was the strongest in two years as the introduction of salads helped boost sales.

"We are encouraged by this progress and confident that our service, food, value and marketing initiatives will generate steady improvements over the long term," he said.

Bell, who had cancer surgery May 5, told analysts on a conference call that his health continues to be good after three chemotherapy treatments.

"I feel good, and I'm looking forward to a complete recovery," he said. "And I'm focused on the business at hand. And that business is the ongoing revitalization of McDonald's."

After a long stagnant period, the Oak Brook, Ill.-based company has been re-energized by the introduction of premium salads — new to Europe this spring — along with McGriddles breakfast sandwiches and a payoff from its "I'm lovin' it" advertising campaign.

But company executives said that the gains can be attributed more to improved restaurant operations rather than any single promotion, especially in the United States.

"Clearly there has been a solid lift in the U.S. business," said chief financial officer Matthew Paull, citing the benefits of menu, service and value initiatives.

McDonald's sold more salads last month than it did a year earlier when it benefited from an initial surge of publicity, the company said.

In its 13,000-restaurant U.S. business, 80 percent of its restaurants stayed open longer than a year ago and 19 percent offered 24-hour service. The cashless payment method that began at U.S. restaurants this year is speeding up service and increasing transactions, the company said.

For the first six months, net income was $1.1 billion, or 87 cents a share, up 33 percent from $798 million, or 63 cents a share, in the first half of 2003. Revenues rose 8 percent to $9.1 billion from $8.1 billion.

McDonald's shares fell 9 cents to close at $27.57 yesterday on the New York Stock Exchange.