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Mcdonalds first loss

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Business - Reuters

McDonald's to Post First-Ever Loss
Tue Dec 17,11:50 AM ET Add Business - Reuters to My Yahoo!

By Deborah Cohen

CHICAGO (Reuters) - McDonald's Corp. (NYSE:MCD - news), the world's largest restaurant company, warned on Tuesday it would post its first-ever quarterly loss after cutting jobs and closing restaurants amid intense competition and deteriorating sales in the saturated U.S. fast-food market.

Shares of McDonald's fell more than 8 percent in morning New York Stock Exchange (news - web sites) trading, tumbling $1.42 to $15.96, after hitting their lowest point in nearly eight years. The stock was the most actively traded on the NYSE, with nearly 12 million shares changing hands.

The U.S. fast-food market has become increasingly competitive as McDonald's, hamburger rivals Burger King Corp. and Wendy's International Inc. (NYSE:WEN - news) and Taco Bell parent Yum Brands Inc. (NYSE:YUM - news) struggle to maintain market share as consumer tastes change and other fast-food options emerge, such as sandwich chain Panera Bread Co. (NasdaqNM:PNRA - news).

McDonald's has experimented with other concepts, including pizza and Mexican-food chains, while Wendy's has relied on its Canadian doughnut chain to drive growth. Yum has been pushing aggressively into overseas markets such as China.

So far in the fourth quarter, McDonald's sales at stores open at least 13 months are down 1.6 percent before the effects of foreign exchange, the company said in an updated fourth-quarter earnings outlook.

Same-store sales in the United States, McDonald's largest market, fell 1.3 percent in October and November and 1.5 percent through the first 11 months of the year, a sign that the company's new discounting strategy is not meeting expectations, analysts said.

"It's clear that the discounting program is not working," said Bear Stearns analyst Joe Buckley, referring to a new "Dollar Menu" McDonald's recently launched to drive up sales. "To improve service is very important for them, I think that's kind of the short-term key."

McDonald's, whose Chief Executive Jack Greenberg is resigning at year-end, also indicated that quarterly sales are worsening, with sales in December showing poorer trends than October and November. The company has reported lower earnings in seven of the past eight quarters.

Incoming CEO Jim Cantalupo, former vice chairman and president, is in the process of "aggressively reviewing" all aspects of the restaurant company's operations, moves aimed at improving financial performance. The review could result in fourth-quarter charges beyond the $390 million now earmarked for worldwide restructuring, McDonald's said.

In November, McDonald's said it would close about 175 restaurants, slash up to 600 corporate jobs and pull out of three countries in the Middle East and Latin America.

The actions signal a pullback for a company with some 30,000 worldwide restaurants that has been criticized for sacrificing profits in favor of aggressive expansion.


FIRST QUARTERLY LOSS

Including charges, McDonald's said it expects to post a loss of 5 cents to 6 cents a share. Before items, the company said it will earn 25 cents or 26 cents a share, short of analysts' expectations, including a foreign currency benefit of 1 cent or 2 cents a share. Last year the company earned 21 cents per share, or 34 cents before items.

"With a new management team stepping up, I don't think anybody should be surprised that a company in this situation would lower the bar...for near-term earnings," said David Kolpak, a buy-side analyst with Victory Capital Management, which owned 3.6 million shares through May. "I would expect this to clear the decks in terms of getting their cost structure in better shape for 2003."

McDonald's had been expected to earn 31 cents a share on average in the fourth quarter before items, according to recently lowered analysts' forecasts tracked by Thomson First Call.

Rising administrative costs, expected to be up 12 percent on higher marketing and technology expenses, are also pressuring earnings in the quarter, McDonald's said.

McDonald's did not schedule its typical conference call to accompany its quarterly update, and executives were not available to comment further on the outlook.

"This has been a difficult year and our financial performance has been below expectations," Chief Financial Officer Matthew Paull said in the outlook. "I am confident we will improve our business."



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