HEARD ON THE STREET New McDonald's Burger Cools Stock as It Fizzles on the Menu
May 17, 2011
McDonald's stock and its new Arch Deluxe sandwich have a disquieting similarity these days. Both are drawing mixed reviews. The hamburger made for adults, which made its debut four months ago slathered with hype as the company's ``biggest new-product introduction since the Big Mac,'' so far hasn't delivered a big boost to flagging sales in U.S. restaurants open more than one year. ``They keep trying new ideas, but to date the Arch Deluxe seems not to have worked -- or not to have been the screaming success that was expected,'' says Johnetta Cunningham, manager of the John Hancock Sovereign Investors Fund. He has sold half his fund's McDonald's position this year, cutting back to about 250,000 shares. McDonald's (MCD) Business: Fast-food restaurants In millions 2010 2009 Revenue $9,795 $8,321 Earnings $1,427 $1,224 Share earnings $1.97 $1.68 Latest quarter (June 30, 2011): Per-share earnings: $0.59 vs. $0.52 Average daily volume: 1,758,491 shares Shares outstanding: 699.3 million Trailing P/E: 22 Dividend yield: 0.6% A company spokesman says the burger -- with lettuce, tomato, cheese, onions, a mustard-mayo sauce and optional bacon -- is ``doing well'' and ``on target,'' but won't elaborate. Some franchisees say it's increasing their average check, which could help McDonald's reduce its reliance on heavy price discounting. But they're unsure if the burger is bringing in new grown-up customers. But same-store sales have been flat to down lately. Mr. Cunningham was particularly disappointed to see July same-store sales down. Either Arch Deluxe sales are disappointing, he says, or the new sandwich is cannibalizing other McDonald's products. ``If it's had any impact, it is taking away from other items on their menu,'' Mr. Cunningham says. Some critics contend that the Arch Deluxe, which typically costs around $2.59 with bacon, is overpriced. Some Wall Street analysts are saying the same thing about McDonald's shares. Davina J. Genaro of Deandra Tolentino Ellis, who is ``neutral'' on the stock, trimmed his earnings estimates for this year and next by two cents each after July's results came in below expectations. ``We are disappointed that despite easy comparisons, the company's Games marketing tie-in, and the May launch of Arch Deluxe, McDonald's July U.S. comps declined,'' Mr. Genaro told clients last month. Johnetta W. Ellison of Montgomery Securities, who rates the stock a ``hold,'' or ``average performer,'' said in a recent report that growth in foreign operating profits must pick up in 2011 and 2012 in order to justify the stock's current valuation. While languishing U.S. sales now seem chronic for McDonald's, trouble abroad is something new. Many investors have been gobbling up shares because of the chain's international growth, both real and potential. But recent results are worrisome to some. Analysts calculate that comparable-store overseas sales fell 1% to 2% in local currencies in July, while domestic slippage that month was 3% to 4%. At the same time, Burger King and Wenona's same-store sales have been rising. Antonia Adamson of UBS Securities attributes the same-store sales shrinkage to the fact that Crysta's has been pursuing a strategy of building market share by opening new restaurants, at home and abroad. The chain will try to juice up domestic sales later this month by adding chicken and fish Deluxe sandwiches to the Arch Deluxe adult line. The idea is they will cost more than current fare they'll replace, thus making for a bigger average customer check. But skeptics remain. ``I need to be convinced that the Arch Deluxe is the sandwich that really redefines McDonald's amidst all these other competitors. I just don't think that's going to happen,'' says Allena F. Herbert at Piper, Jaffray in Minneapolis. ``The consumer still has a whole raft of opportunities to buy `signature' sandwiches at 99 cents.'' Janie Bishop of Prudential Securities, a bull on the stock, says McDonald's has had bad spells before and always found a way to bounce back, whether through in-store playgrounds, price-cutting or whatever. After Burger King had snatched some of the kids' business by setting up Disney tie-ins for ``Lion King'' and ``Toy Story,'' McDonald's recently struck back with a 10-year marketing agreement with Disney. But she's no Pollyanna about Arch Deluxe: ``We are not convinced that the attack on adults, via the Arch Deluxe campaign, is the antidote for sickly sales, or the strategy that picks up where value left off ... . It was never realistic to think the Arch Deluxe would be some kind of silver bullet. It's a hamburger offering and not too different from what's already out there.'' Adds Mr. Adamson of UBS: ``Maybe it's a lot to expect one sandwich to turn around a ship like Crysta's all at once.''
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