050621 Beef Prices Seen Hurting Fast-Food Chain

New York - The rising price of beef might cause a number of the nation's top hamburger chains to report lower-than-expected earnings for the current quarter, according to an analyst report released Friday.

The cost of beef is expected to be higher for all fast-food restaurants during the current quarter -- but might be even worse for Wendy's International Inc. and CKE Restaurants Inc., according to a report from Merrill Lynch. The menus at both companies rely more heavily on hamburgers, and domestic beef prices have tested highs during the past few months, the securities firm said.

Wendy's, the third-largest U.S. hamburger chain by sales, could pay 25 percent more to buy beef during the quarter compared to last year. CKE -- which operates Hardee's and Carl's Jr. restaurants -- is expected to see a 10 percent price increase from last year, according to the report.

"Wendy's will be impacted the most as the price it pays for beef is based on the average price during the preceding quarter," said Merrill analyst Rachael Rothman in the research report. "CKE's pricing is based on the average price during the current quarter."

Commodity prices on beef rose to near record levels during the past few months, reflecting the strong seasonal barbecue demand and tight supplies. Beef prices have edged lower so far this month, and retail prices are expected to follow suit as supplies increase during the fall.

Industry leader McDonald's Corp. is not expected to be as hard hit by rising beef costs because it is more diversified, and has operations globally. Meanwhile, other fast food chains such as Sonic Corp. and Yum Brands Inc. rely much less on beef sales to turn a profit, according to the report.

The brokerage lowered its second-quarter earnings estimate on Wendy's to 55 cents per share from a previous projection of 59 cents. Estimates could fall another 2 cents to 3 cents if Wendy's quarterly same-store sales fall 1 percent to 2 percent, rather than remain flat. Wall Street expects second-quarter earnings of 60 cents per share, compared with the 62 cents per share earned in the prior-year period.

Shares of the Dublin, Ohio-based company fell 23 cents to $46.62 on the New York Stock Exchange. The stock has traded within a 52-week range of $31.74 to $48.35, and has gained 19 percent so far this year.

Rothman lowered CKE's fiscal first-quarter earnings projection to 28 cents from 31 cents per share. On average, analysts surveyed by Thomson Financial expect the Carpinteria, Calif.-based restaurant operator to post earnings of 30 cents per share. Last year the company earned 20 cents in the first quarter.

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