UPDATE 3-McDonald's signals weak 2013 as U.S. rivals, Europe economy bite

Mon Jul 22, 2013 1:29pm EDT

* Competition from nimble U.S. rivals weigh
    * Weaker European economy hampers sales
    * Shares down nearly 3 percent


    By Lisa Baertlein
    July 22 (Reuters) - McDonald's Corp on Monday dashed
investor hopes that its business would strengthen in the second
half of the year, blaming tougher competition in the U.S. and
weaker sales in Europe. 
    The world's biggest restaurant chain by sales reported a
lower-than-expected quarterly profit and said it expects global
same-restaurant sales in July to be relatively flat, sending its
shares down almost 3 percent in midday trading.
    "Based on recent sales trends, our results for the remainder
of the year are expected to remain challenged," Chief Executive
Don Thompson said in a statement. 
    Wall Street analysts had expected McDonald's business to
pick up in the middle of this year as food inflation and other
pressures ease.  
    "I would have liked to have seen them be a little more
positive on things," Edward Jones analyst Jack Russo said.    
    The latest quarterly results from the seller of Big Mac
hamburgers, french fries and Happy Meals heaps pressure on
Thompson, who was promoted to the CEO position in July 2012,
when the chain was enjoying a multi-year run of rising sales and
profits.
    Still, Russo said Wall Street would likely give the
well-regarded McDonald's CEO a pass for a bit longer: "I don't
see an operator in the United States or Europe really tearing it
up."In the second quarter ended June 30, global sales at
McDonald's restaurants open at least 12 months rose 1 percent,
in line with analysts' expectations.
    McDonald's said second-quarter same-restaurant sales in the
United States were up 1 percent, missing the average analysts'
forecast of a 1.5 percent increase.
    The company is fighting to boost sales as smaller U.S.
rivals such as Wendy's Co and Burger King Worldwide Inc
 debut attention-grabbing food, like bacon sundaes and
limited-time offers.
    Shares of McDonald's were trading at down 2.8 percent at
$97.45, while stock in Wendy's was up 1.1 percent at $6.76.    
    Wendy's, known for its thick Frosty shakes and square
hamburgers, recently launched a Pretzel Bacon Cheeseburger that
appears to be chain's best-selling new product in at least a
decade. 
    "This pressure on McDonald's could last over the third
quarter as a whole, and perhaps beyond, if Wendy's adds its
Pretzel Bacon Cheeseburger as a permanent menu item - which
looks increasingly likely," Janney Capital Markets analyst Mark
Kalinowski said. 
    McDonald's, which still dominates the fast-food industry, 
has been offering late-night breakfasts, tweaking other menus
and advertising value-priced meals to bring in more traffic.
    The chain said its indulgent new line of Quarter Pounder
hamburgers - including a bacon habanero ranch version - have
performed well. It recently axed lackluster sellers like premium
Angus burgers and its Fruit & Walnut Salad while also catching
up with rivals by introducing an egg white version of its
popular McMuffin breakfast sandwich.
    In Europe, same-restaurant sales were down 0.1 percent in
the quarter - the third consecutive quarter of declining sales
in the region. In the Asia/Pacific, Middle East and Africa
(APMEA) region, second-quarter sales fell 0.3 percent.
    Analysts polled by Consensus Metrix had forecast declines of
0.1 percent in Europe and 0.2 percent in APMEA. They expect
Wendy's to report a 1.1 percent gain in second-quarter sales.
    McDonald's second-quarter net income rose 3.7 percent to
$1.40 billion, but earnings per share of $1.38 missed analysts'
estimate by 2 cents, according to Thomson Reuters I/B/E/S.
    Nevertheless, McDonald's executives said the chain is
gaining share in the so-called informal eating out category,
which is dominated by fast-food operators. Still, they warned
that significant coupon and voucher discounting is keeping them
from raising prices to offset higher costs.
    Bill Smead, a portfolio manager at the Smead Value Fund in
Seattle, holds shares in McDonald's and is betting the iconic
and well-run chain will see better days ahead. 
    The company is in a normal down cycle after benefiting when
the global recession forced cash-crunched diners to trade down
to McDonald's from pricier chains to save money. It also got a
big bump from profit-boosting new drinks like lattes and
smoothies, he said.
    "McDonald's is an emotional and legal addiction in many
cases. You went there, your kids go there, your grandkids go
there," Smead said.
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