Wall Street cuts McDonald's profit estimates on Russia costs

[March 19, 2022]  By Hilary Russ

NEW YORK (Reuters) - Wall Street analysts have slashed their forecasts for McDonald's Corp's 2022 and 2023 profit, the latest sign that some Western companies stand to take a financial hit as the costs of Russia's invasion of Ukraine grow.

Morgan Stanley on Thursday said it now expects net profit from the fast food company of $9.25 a share for this year and $10.62 for 2023, reductions of 8% and 3%, respectively, from its prior view.

Earlier, the research firm Gordon Haskett cut its estimate by 5% in 2022 to $9.75 a share and by 3% for 2023 to $10.66 a share.

McDonald's declined to comment on the moves.

The American burger chain - among the first to open in Moscow in the post-Soviet era - is paying for leases and wages for its 62,000 employees in Russia, despite starting to close 847 restaurants there, most of which it owns and operates. It is also paying wages for its Ukraine staff.

The cost is expected to be $50 million a month, or at least $450 million through the end of this year.

Stores in Russia and Ukraine - which are now shuttered - would normally generate operating profit of roughly $310 million annually, according to Gordon Haskett.

The Chicago-based company also faces potential hits to the value of its assets in Russia, whether through a mark down, sale to a local owner or government seizure, according to Morgan Stanley, which did not factor those into its lowered profit estimates.

The bank still finds McDonald's shares attractive because they can hold up in uncertain consumer environments.

A view shows a McDonald's restaurant in Saint Petersburg, Russia March 8, 2022. REUTERS/Anton Vaganov/File Photo

McDonald's has more exposure to Russia than other global fast-food chains. It entered the country in 1990 and owns 84% of its restaurants there.

Other brands including Starbucks Corp and Burger King are less exposed in Russia. Their restaurants are largely owned by independent operators under joint ventures and master franchisee agreements.

After McDonald's, Yum Brands Inc, parent to KFC and Pizza Hut, is most exposed. Russia and Ukraine account for about 3% of its consolidated operating income, Gordon Haskett analysts said. That is about $64 million based on 2021 figures, according to a Reuters analysis of Refinitiv data.

Morningstar analysts have not changed their forecasts for McDonald's or Yum. But on March 8, said they are concerned about higher fuel prices related to the war and the impact on consumer spending and restaurant margins.

McDonald's global operating income reached $10.4 billion in 2021, Refinitiv data showed.

While McDonald's has said the Russia closures are temporary, Gordon Haskett analysts said they believe the stores in Russia with the iconic golden arches will remain shuttered into 2023.

(Reporting by Hilary Russ in New York; Editing by Bill Berkrot)

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