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

A man holds a tray of food at a McDonald's restaurant in Times Square, New York in this May 31, 2012 file photo. REUTERS/Mike Segar/Files
A man holds a tray of food at a McDonald's restaurant in Times Square, New York in this May 31, 2012 file photo. REUTERS/Mike Segar/Files

By Lisa Baertlein

(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."

Graphic on McDonald's results: http://link.reuters.com/xut79t

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.

(Reporting by Siddharth Cavale in Bangalore and Lisa Baertlein in Los Angeles; Editing by Saumyadeb Chakrabarty, Robin Paxton and Sofina Mirza-Reid)

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