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McDonald's Signals Weak 2013 as U.S. Rivals, Europe Economy Bite

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)

Middling Jobs Gain Signals a Long Path to Healthy Payrolls

American employers added 175,000 jobs in May, almost exactly the average monthly job growth over the last year, the Labor Department reported Friday, and wages remained basically flat. Economists were relieved that the numbers were not worse, given a string of other disappointing data in recent weeks, but noted that current job trends still left the economy far short of what it is capable of if Americans were more fully employed.

At the current pace of job and labor force growth, it would take nearly five years to get the economy back to the low unemployment rate it had when the recession officially began in December 2007.

“I feel hopeless, and that just makes it hard,” said Sherry Lockhart, 53, of Enumclaw, Wash., who was laid off by the state’s liquor control board a year ago, when voters privatized liquor sales. Now, her jobless benefits are about to be slashed as a result of federal spending cuts. “I just feel I’ve done my best over the years, and I feel like I haven’t failed the system. The system has failed me, and millions more.”

By contrast, Wall Street was pleased with the latest report because the steady but modest gains suggest that the Federal Reserve will not feel comfortable tightening monetary policy anytime soon, as some had feared would be the case if the job market suddenly started showing major improvement. The Dow Jones industrial average and the broader Standard & Poor’s 500-stock index each closed up for the day by more than 1 percent.

“It’s a decent report, but it’s not by any means robust,” said Conrad DeQuadros, senior economist at RDQ Economics, a research firm. “It’s certainly not strong enough to get the Fed to make any significant changes at its meeting in June.”

The unemployment rate rose to 7.6 percent from 7.5 percent in April. The cause behind the uptick in the unemployment rate, at least, was also mildly encouraging: more people joined the labor force, perhaps indicating that Americans who have been sitting on the sidelines believe that they finally have a chance to find a job. This labor force participation rate is still low by historical standards, however.

Consumers have also been relatively upbeat recently. A New York Times/CBS News poll conducted May 31 to June 4 found that 39 percent of respondents believe the condition of the economy is very or fairly good, the highest share saying this both since President Obama took office and since the recession began in December 2007.

Despite signs of optimism from consumers and investors, other indicators of the health of the economy and the job market have been mixed. Average weekly hours and average hourly earnings, for example, have shown little improvement in recent months, according to the Labor Department. Wages are up just 2 percent from a year earlier, which leaves most Americans treading water, barely outpacing the rate of inflation.

“The wage gains are very disconcerting, and particularly strange when you see these surveys of employers who say they have positions they can’t fill,” said Ian Shepherdson, chief economist at Pantheon Macroeconomics. “That means they should be bidding up wages.”

Wage growth may be held back by the composition of jobs being created, he said, as there are many jobs being added in low-paying sectors like retail. Restaurants and bars, for example, have added 337,000 jobs over the last year; that category now makes up about 7.6 percent of all payroll jobs, its largest share on record.

The other big industry to add jobs in May was professional and business services, particularly temporary help services. Temp services employment has been growing for six consecutive months, and as of May, about 2 percent of all American jobs were in the sector.

The federal government, on the other hand, lost 14,000 jobs in May, partly because of the across-the-board spending cuts, known as the sequestration, enacted by Congress in March.

“With the recovery gaining traction, now is not the time for Washington to impose self-inflicted wounds on the economy,” Alan B. Krueger, President Obama’s chief economic adviser, said in a statement. “The administration continues to urge Congress to replace the sequester with balanced deficit reduction, while working to put in place measures to create middle-class jobs, such as by rebuilding our roads and bridges and promoting American manufacturing.”

Over the last three months, the federal government has lost 45,000 jobs, not including the furloughs that many federal employees are being placed on. The Pentagon, for example, has said that it plans to furlough 680,000 civilian workers starting in early July, with most workers losing about one paid day a week.