2nd UPDATE:McDonald's 2Q Held Back On Weak Sales;Profit Down 8%
July 23 2009 - 1:39PM
Dow Jones News
McDonald's Corp. (MCD) second-quarter was held back on weak June
sales, even as the company met earnings expectations with an 8%
decline due to unfavorable exchange rates and a prior-year sales
gain.
Fast-food demand has been slowing in the U.S. on rising
unemployment and falling grocery-store prices that make eating at
home a good deal. McDonald's, while gaining market share from
competitors like Burger King Holdings Inc. (BKC) and Wendy's/Arby's
Group Inc. (WEN), felt the pinch too, with its June global
same-store sales increase of 2.6%, including a 1.8% rise in the
U.S., below expectations.
McDonald's shares fell $2.37, or 4%, in recent trading, to
$56.45, as some analysts suggested that the fast-food giant, which
has called itself recession resistant, had succumbed to the global
slowdown.
"It's no question that the current economic environment is
challenging and we're not completely immune from its effects,"
McDonald's Chief Financial Officer Peter Bensen said on Thursday's
earnings call.
McDonald's remained confident in its full-year outlook, where
negative effect from foreign exchange abates and commodity costs
come down.
The world's largest hamburger chain added that it expects July
sales to be similar to or better than June figures. Investors have
come to count on McDonald's to deliver strong sales, and the
current environment has caused diners to seek lower prices when
they do go out to eat, leaving McDonald's in a good position with
its low prices.
McDonald's has notably made splashes by rolling out
higher-priced products in the recent quarter, most notably
promoting its premium coffee products heavily. It also introduced
its $4 Angus Burger in the quarter, which it plans to start
advertising in the coming months. Such items may have drawn some
attention from its value products, leading to weaker sales.
"McCafe is a long-term home run for them, but given the high
price of some items, it might not provide that sales jolt," Telsey
Advisory Group restaurant analyst Tom Forte said. "Given the
prolonged recession, some of these higher items may not be
ideal."
As McDonald's backed the McCafe launch, it says it also took
advantage of lower advertising rates to broadcast more commercials
and post more outdoor billboards to support core and value
products, McDonald's President and Chief Operating Officer Ralph
Alvarez said. That's helping McDonald's stay ahead of its
competitors in a declining category.
"We've had a slight uptick in guest count, which we believe, in
a market share battle, that is the battle," he said. With hot
competition among the burger chains and consumer sensitivity to
prices, McDonald's says it's not planning to raise prices this
year.
McCafe sales are meeting or exceeding expectations, Alvarez
said, with coffee now making up 5% of total sales compared with 2%
two years ago. The company plans the second step of its beverage
platform, which includes fruit smoothies, to launch later this
year.
McDonald's second-quarter profit came in at $1.09 billion or 98
cents a share, including a one-cent benefit from an asset sale,
down from $1.19 billion, or 1.04 a share, a year earlier. Revenue
decreased 7% to $5.65 billion.
Analysts had been looking for earnings of 97 cents a share on
$5.72 billion in sales.
For the quarter, McDonald's posted global same-store sales
rising 4.8%, with a 3.5% gain in the U.S. on sales of classics like
the Big Mac as well as value drinks like $1 sweet tea.
Same-store sales rose 6.9% in Europe, with strong results in the
U.K., France and Russia. Same-store sales in the Asia/Pacific,
Middle East and Africa region rose 4.4%, bolstered by strength in
Australia though China remained negative.
-By Paul Ziobro, Dow Jones Newswires; 212-416-2194;
paul.ziobro@dowjones.com
(Tess Stynes contributed to this report.)