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McDonald’s May sales miss Street estimate, weak second quarter continues

A McDonald's drive-thru location is seen in Toronto


McDonald's Corp. reported a lower-than-expected rise in global sales at established restaurants in May and warned that austerity measures in Europe and global economic volatility were taking a bite out of results.

May sales landed below Wall Street's estimates in Europe and the United States -- its two largest markets -- and unexpectedly fell in Asia Pacific, Middle East and Africa, due to declines in Japan and China, the company said on Friday.

The world's biggest hamburger chain has been more resilient to economic gyrations than most of its competitors. But analysts said it faced a perfect storm of challenges during May, when European debt worries roared back to life, rival restaurants stepped up promotions and growth cooled in China.

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"This month's results point to a slower pace of growth ahead for the company after a multi-year period of exceeding expectations," Bernstein Research analyst Sara Senatore said.

Foreign currency rates and higher costs, due in part to preparations for the summer Olympics in London, also are expected to weigh on earnings this quarter, McDonald's said.

The report sent McDonald's shares as low as $85.92 before easing to $87.86, off 0.6 per cent, in midday trading.

The reaction spilled over to Yum Brands Inc., which dropped 4 per cent to $64.08 and was one of the top decliners on the New York Stock Exchange. Yum's KFC chain is the biggest western restaurant brand in China.

Sales at McDonald's restaurants open at least 13 months increased 3.3 per cent globally. Analysts polled by Thomson Reuters expected a rise of 4.6 per cent, while analysts queried by Consensus Metrix expected a 5.2 per cent gain.

For Europe, which edges out the United States as the company's top revenue producer, same-store sales rose 2.9 per cent, below expectations of at least 4.4 per cent.

Sales fell in Germany, which has been more sensitive than many other markets to economic shocks, but remained positive in France and other important regional markets.

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McDonald's has been a top performer in Europe despite many months of worry over the financial crisis and related belt tightening.

The softer results suggest "that the economic climate must be getting worse," Edward Jones analyst Jack Russo said.

Europe was also a disappointment in April, when McDonald's same-store sales rose 3.3 per cent, and the trend stoked concerns that European consumer spending was weakening.

U.S. same-restaurant sales rose 4.4 per cent last month, just below Wall Street's most conservative projection of 4.7 per cent.

In the Asia Pacific, Middle East and Africa unit, same-restaurant sales fell 1.7 per cent, while analysts expected a jump of at least 3.2 per cent. Japan is McDonald's largest market in Asia, but China often steals headlines because the company is building a lot of restaurants there.

The Golden Arches chain said unfavorable foreign currency exchange rates would lower second-quarter profit by 7 cents to 9 cents per share.

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Analysts, on average, expected McDonald's to earn $1.41 per share this quarter, according to Thomson Reuters I/B/E/S.

"The second quarter is going to be tough for them. You just hope the back half can get a little better," Mr. Russo said.

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