UPDATE 3-Burger King results ambushed by March demand drop

* Sees Q3 EPS 33 cents-35 cents, Wall St. view 33 cents

* Saw "unanticipated" traffic drop in March

* Q3 sales up 1 pct to $600 million

* Shares down 17 percent in afternoon trading (Adds analyst comments, byline; previous dateline NEW YORK)

By Lisa Baertlein and Aarthi Sivaraman

LOS ANGELES/NEW YORK, April 15 (Reuters) - Burger King Holdings Inc BKC.N said on Wednesday it saw a surprise drop in customer visits to its restaurants in March, shaking investor confidence and sending shares down 17 percent.

Burger King also said its fiscal third-quarter profit should meet or exceed Wall Street's expectations, although it would be largely due to a lower tax rate.

"People are concerned with how quick the same-store sales slowed," Oppenheimer restaurant analyst Matthew DiFrisco said.

Burger King, best known for its Whopper hamburgers, said it faced an "unanticipated traffic slowdown" in March across most company-owned restaurants, which hurt its margins for the quarter.

Since the latest quarterly financial reports are just beginning to hit, Telsey Advisory Group analyst Tom Forte said "it remains to be seen if it was a market share loss."

Analysts expect bigger rival McDonald's Corp (MCD.N) to have outperformed Burger King during the quarter, in part because McDonald's restaurants are spread more evenly about the country.

Stifel Nicolaus analyst Steve West said Burger King has no company-owned eateries west of the Mississippi River and that the U.S. traffic declines were likely due to weakness in the Southeast or mid-Atlantic regions.

Analysts said the precipitous traffic decline came as a particular surprise because Carrols Restaurant Group (TAST.O), the company's largest franchisee, recently said sales at its established Burger Kings were up about 5 percent as of February.

West said Burger King has turned in "four quarters in a row of poor-quality earnings" and the credibility of management, which recently expressed bullishness, is taking a hit.

LOWER TAXES HELP PROFIT

Burger King expects to report a profit of 33 cents a share to 35 cents a share for the fiscal third quarter, which ended on March 31.

Analysts, on average, expect a profit of 33 cents a share, according to Reuters Estimates.

Burger King said its tax rate for the quarter was significantly lower than the year-earlier period and boosted earnings by about 5 cents per share. The company also got a lift from better cost controls and a drop in interest expense.

The hamburger chain said quarterly sales rose 1 percent to $600 million. Worldwide sales at stores open at least one year were up 1 percent, while U.S. and Canada same-store sales were up 1.6 percent.

Burger King said that, so far in April, same-store sales have improved, mostly due to the shift of the Easter holiday into April from March and efforts to stem hefty traffic declines in Germany and Mexico.

VALUE WAR

Fast-food chains such as McDonald's and Yum Brands' (YUM.N) Taco Bell have aggressively pushed value menus that feature food items at or around $1 to draw in customers amid the sharp economic downturn.

Competition has spiked along with increased promotions, said Forte, who noted Sonic Corp (SONC.O) launched a value menu in late 2008, while Yum's KFC brand launched a menu with 10 items priced at 99 cents, $1.49 or $1.99 earlier this year.

DiFrisco said Burger King may not have factored in how much Easter shifting into April would affect sales and that demand for its new BK Shots -- mini-burgers sold in packs of two and six -- could have lost some steam after a very strong showing in February.

"On top of that, you have unemployment rising, which is going to hurt the fast-food brands significantly more," DiFrisco said.

Burger King's traffic declines were steepest in Mexico and Germany. The company said it has taken steps to woo customers in those two markets, which include relaunching a 99-cents value menu, promoting new combo meals and longer hours of operation during breakfast time in Germany.

In Mexico, Burger King is focusing on its "Come Como Rey," or "Eat Like a King" value menu and launched a national coupon campaign with laundry detergent brand VIVA to refresh demand.

It has stepped up advertising in both markets.

In afternoon trading, Burger King shares were down at $18.82 after falling as low as $18.62 earlier. McDonald's shares were down 2.3 percent at $53.54, while the shares of Wendy's/Arby's Group Inc WEN.N, which owns No. 3 hamburger chain Wendy's, declined 3.6 percent to $5.11. (Reporting by Aarthi Sivaraman and Lisa Baertlein; Editing by Dave Zimmerman and Andre Grenon)