McDonald's forecasts tough fourth quarter

Lisa Baertlein
A McDonald's restaurant sign is seen at a McDonald's restaurant in Del Mar, California April 16, 2013. REUTERS/Mike Blake

By Lisa Baertlein

(Reuters) - McDonald's Corp warned on Monday that global sales at established restaurants would be relatively flat in October and signaled that weakness would continue in the fourth quarter amid stiff competition and a halting economic recovery, heaping pressure on its chief executive.

CEO Don Thompson, at the helm for more than a year, has switched top management and shaken up menus to boost sales and profits. Now, analysts are asking if McDonald's woes are due to poor execution rather than external factors.

The company has reported four straight quarters of disappointing sales, Hedgeye Risk Management restaurant analyst Howard Penney said on Twitter.

"When will the (company) transition from blaming the economy to internal issues?" said Penney, who told Reuters that McDonald's high-profile McCafe coffee and beverage expansion masked a slowdown in its core business of selling hamburgers and french fries.

McDonald's shares fell 1 percent in midday trading after investors digested the company's forecast for restaurant margin declines in the fourth quarter similar to those suffered in this year's first quarter.

The outlook suggested more margin pressure than the market was expecting, Morningstar analyst R.J. Hottovy told Reuters.

McDonald's, which has roughly seven times the sales of Wendy's Co and Burger King Worldwide Inc combined, has been slower than its rivals in adapting to changing consumer demands.

Shares of Burger King inched up 0.2 percent and Wendy's rose 0.6 percent.

Global sales at McDonald's restaurants open at least 13 months gained 0.9 percent in the third quarter, falling just short of analysts' average estimate on softer-than-expected results in all of the company's major markets, according to Consensus Metrix.

In the United States, McDonald's Monopoly game promotion and Mighty Wings limited-time offer met internal expectations but failed to substantially lift results amid intense discounting.

While fast-food chains fight hard for the business of cash-crunched, lower-income diners, former McDonald's unit Chipotle Mexican Grill Inc is enjoying more visits from wealthier - and often younger - diners.

"We think (McDonald's) is losing its appeal to the millennial generation, who prefer healthier foods," S&P Capital IQ analyst Jim Yin said in a note. Such customers are often more willing to pay a bit more for their meals.

France, which leads McDonald's top revenue market of Europe, reported its first quarter of same-restaurant sales growth in a year in the third quarter, while results in Germany remained rocky.

McDonald's lacks the ability to raise prices in Europe, CEO Thompson said on a conference call with analysts.

Both Japan and China reported declines in same-restaurant sales for the quarter, dragging down results from the Asia/Pacific, Middle East and Africa region. Based on the results, McDonald's is delaying new restaurant openings in emerging markets like China.

A recent survey from Goldman Sachs suggested McDonald's, which has lagged rivals in introducing popular new menu items, might be losing favor with U.S. diners.

The company, which built a large lead over rivals after the global recession, is fighting to step up sales in the United States amid a barrage of new items and short-time specials from smaller chains.

McDonald's previously got a sales bump from new products including oatmeal, sandwich wraps and lattes, but its more complicated menu has slowed service at the drive-thru window.

Third-quarter net income rose 4.6 percent to $1.52 billion, or $1.52 per share, coming in a penny better than the analysts' average estimate, according to Thomson Reuters I/B/E/S. Revenue was up 2.4 percent at $7.32 billion.

Restaurant margins at both franchised and company-operated stores slipped in the quarter.

McDonald's shares were down 91 cents to $94.29 on the New York Stock Exchange.

(Reporting by Lisa Baertlein in Los Angeles and Aditi Shrivastava in Bangalore; Editing by Sriraj Kalluvila, Maureen Bavdek and John Wallace)