001031 Fuel, Economy to Hit Fast-Food Results

Chicago - Big fast-food chains such as McDonald's Corp. are expected to report lackluster earnings for the third quarter, as higher fuel prices and other economic woes eat into profits.

Rising gasoline prices are crimping the spending habits of fast-food restaurants' key spenders -- younger, budget-conscious consumers whose discretionary income suffers when they shell out more at the pump.

“We think higher gasoline prices have much more of an impact on (fast- food) customers,” said Bear Stearns analyst Joe Buckley. “Heavy users of fast- food tend to be male, aged 18 to 30, and are at a point in their life cycle where their income level is less.”

Chains with heavy international exposure, such as Oak Brook, Illinois- based McDonald's, also face uncertainty over the impact of the weakened euro, which threatens to cut into annual profits.

McDonald's, which relies increasingly on overseas markets for growth, warned last month that foreign currency exposure could shave as much as 7 cents per share off its bottom line for the year, 2 cents more than it had previously warned.

The company is expected to earn 41 cents a share in the third quarter, up from 39 cents in the same period in 1999, and $1.50 a share for the full year, up from $1.39, based on a recent poll by First Call/Thomson Financial.

Wholesale beef prices, which hit their highest level since 1993 in mid- April, will continue to hurt U.S. fast-food chains' profit margins, along with a tight labor market, analysts said. Beef prices have come down but still remain at high levels compared to recent years.

That puts pressure on the results of operators such as Tricon Global Restaurants Inc., which has been struggling to jump-start sales at its Taco Bell chain.

There's a “turnaround in sight, but there'll be bumps through year-end,” wrote Lehman Bros. analyst Mitchell Speiser about Tricon in a recent report. Tricon also runs the KFC and Pizza Hut chains.

The Louisville, Kentucky-based company is expected to post flat quarterly profits of 70 cents a share and full-year results of $2.93 a share, up from $2.58.

“Even the fast-food operators who historically have been the best -- Wendy's and Jack in the Box -- have seen their same-store sales subside some in recent months,” Bear Stearns's Buckley said.

Indeed, large-cap fast-food chains are expected to post average same-store sales increases of about 1%, versus 3% a year ago, according to Speiser. Same- store sales are sales at stores that have been open for at least a year.

Still, Dublin, Ohio-based Wendy's International Inc., the No. 3 U.S. hamburger chain behind McDonald's and London-based Diageo Plc's Burger King unit, is emerging as a clear favorite in a sector whose share prices remain well below their mid-1999 peaks.

“One reason we like Wendy's is that it positions itself as better quality,” said Salomon Smith Barney analyst Mark Kalinowski. “It's actually taken (market) share in the quick-service sector seven years in a row.”

Wendy's, which also runs Canadian donut chain Tim Hortons, is expected to post a 5-cent gain in quarterly profits to 40 cents a share.

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