McDonald's France lags in August, shares fall

LOS ANGELES/CHICAGO (Reuters) - McDonald's Corp's European sales growth fell in August from the sizzling levels it experienced for much of the year due to weakness in France, which generates the company's biggest European sales, and its shares fell nearly 3 percent.

The world's biggest hamburger chain said on Thursday that sales at European restaurants open at least 13 months rose 2.2 percent in August compared with the 5 percent to 6 percent analysts had expected.

McDonald's spokeswoman Heidi Barker said France's August sales were "slightly negative due to less effective promotions versus the same time last year." She said McDonald's does not disclose sales figures for individual markets.

Europe generates about 40 percent of McDonald's revenue. No. 2 hamburger chain Burger King has a significantly smaller footprint in Europe, with no restaurants in France. No. 3 Wendy's does not have restaurants in Europe.

McDonald's' European same-store sales growth has been above 5 percent for five of eight months this year.

"This is a lesson learned. The French consumer needs a more consistent, clear value message," Oppenheimer analyst Matt DiFrisco said.

He said McDonald's needed better marketing of low-priced menu options in France.

McDonald's size and mass-market appeal make it a bellwether of consumer spending trends, but analysts underscored that one month of disappointing results from France does not necessarily mean the European market is slowing.

The decline in same store sales from France was the first since November 2005, according to Barclays Capital analyst Jeffrey Bernstein.

Analysts said McDonald's results were strong from Britain, another top European market for the company, and Russia.

But, Edward Jones analyst Jack Russo said, "With government spending being cut back a little bit, you just have to wonder if some of those issues we've been reading about in Europe are starting to catch up with these guys a little bit."

TAKE VAT!

Another reason for the August weakness in McDonald's sales in France could be comparisons with a year ago. In July 2009, France lowered its value-added tax on restaurant meals to 5.5 percent from 19.6 percent, which likely boosted McDonald's sales, Janney Montgomery Scott analyst Mark Kalinowski said.

"Now that we've rolled over the benefits from this modification ... France won't be producing as robust top-line results now that the benefit is gone," Kalinowski said.

McDonald's has been taking market share from rivals like Burger King and Wendy's with clean, well-run restaurants, ample low-priced offerings and new menu items.

The stock has held up well during the economic downturn, and hit a 52-week high of $76.26 after the company released its July sales. Expectations were elevated before release of the August numbers.

The hamburger company's global same-store sales were up 4.9 percent for August and analysts said McDonald's has opportunities to take even more business away from competitors by renovating restaurants and rolling out new beverages to international markets.

Despite high unemployment, U.S. sales at established restaurants were a bit stronger than analysts' average estimate, rising 4.6 percent for August as hot weather increased demand for new high-margin fruit smoothies.

The United States contributes 35 percent of company sales and this year has benefited from new drinks like lattes, smoothies and frappes, and low-cost food items.

The company's same-restaurant sales rose 7.8 percent in the Asia Pacific, Middle East and Africa segments, slightly better than analysts' had expected, fueled by sales growth in Japan, China and Australia.

McDonald's shares were down 2.7 percent at $74.00 in afternoon trading on the New York Stock Exchange.

Shares in Burger King , which gets almost 30 percent of its revenue from Europe and the Asia-Pacific region, were unchanged at $23.69. Shares in Wendy's/Arby's, which is working to expand internationally, were up less than 1 percent at $4.38.

Shares of Yum Brands Inc , the biggest U.S. fast-food operator in China, fell 1.57 percent to $43.81. Yum owns KFC, Taco Bell and Pizza Hut.

(Editing by Gerald E. McCormick and Maureen Bavdek)

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