The Herald Bulletin

Morning Update

Nation & World

July 22, 2013

McDonald's predicts tough year despite new items

NEW YORK — McDonald's is mixing up its menu with healthier, fresher sounding items such as its chicken McWraps, but not enough customers are biting.

The world's biggest hamburger chain on Monday reported a second-quarter profit that rose 4 percent but fell short of Wall Street expectations. It also said July sales are expected to be relatively flat and warned of a tough year ahead, given the heightened competition and rough economic conditions around the world.

"We don't have as much pricing power," said CEO Don Thompson, noting that the company wouldn't be able to easily charge more for its food without the risk of scaring off customers.

McDonald's shares fell 2.7 percent, or $2.69, to close at $97.58. Over the past year, the stock is up 13 percent.

The company, which has more than 34,000 locations worldwide, says global sales edged up 1 percent at restaurants open at least a year. The figure rose by the same amount in the U.S., where McDonald's has been touting its Dollar Menu while also trying to adapt to changing eating habits with items such as its veggie-filled chicken wraps and egg-white breakfast sandwiches.

But the small sales bump in the U.S. wasn't enough to offset the higher advertising and promotional costs for those new items, as well as the reduced efficiency in restaurants. Operating margin declined slightly as a result.

"We threw a lot of new products at restaurants this quarter," Chief Financial Officer Pete Bensen said in a call with analysts. "So our efficiency per crew hour was down a little bit."

The tepid sales growth for the quarter ended June 30 reflects the challenges facing McDonald's Corp., which for years had been a standout in the fast-food industry. Part of the problem is that economic conditions remain weak in many regions of the world, with the company repeatedly noting that people are being more careful about eating out. That's true in Europe and the region encompassing Asia, the Middle East and Africa, the company said, with both posting slight declines in sales at restaurants open at least a year.

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