Analysts Press Management on Marketing, Menu Plans

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CHICAGO ( -- Despite posting its first positive earnings quarter out of the last six, McDonald's Corp. today reported declining same-store sales, casting doubt on the company's earlier earnings and sales forecasts.

In its conference call with analysts, McDonald's executives faced intense skepticism over how and when its new marketing and service initiatives will help the the fast-food chain deliver better sales.

For the quarter ended June 30, the Golden Arches posted a 13% net income gain to $497.5 million, or 39 cents per diluted share, on a 2% systemwide sales gain to $10.4 billion. Much of that gain came from strong sales in Europe and cost-cutting measures.

The bad news
The bad news is that

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much of the growth attributed to U.S. sales came from new store openings, while domestic same-store sales fell 1.6%. Europe was the only bright spot in comparable sales, up 2.7% due to expansion and increased breakfast sales while all the other regions declined. Same-store sales at Latin American stores fell 11.7% for the quarter. Sales in Japan continue to take a hit from the economy and food safety concerns.

"While we are pleased with profit growth in the U.S., our topline sales in the U.S. are not where we want them to be," said Matthew Paull, executive vice president and chief financial officer.

A spokeswoman tried to temper the bad news by saying the second quarter traditionally faces its toughest comparisons due to past boosts from games and Teeny Beanies promotions. Still, executives conceded that Wendy's International and Burger King Corp. have eaten at McDonald's market share with new products and strong sales.

'Quality, service and cleanliness'
"If we can bring up [quality, service and cleanliness], we can bring a lot of [consumers] back," Mr. Paull said.

He said among key initiatives in the works are to increase the fast-food chain's New Tastes Menu and food-based advertising; a possible second-half national rollout of the Mickey D's Dollar Menu now being tested in the Northeast; installing double drive-thrus and remote order-takers; and extending restaurant hours.

Judging from the numerous questions from analysts about when and how the company will improve sales, Wall Street is getting impatient.

Asking for time
McDonald's executives asked for time for the service and marketing efforts to affect sales.

"Achieving this standard with every store and every customer will take time," Mr. Paull said. "We expect to be better than the first six months. The full effect [of quality, service and cleanliness efforts] won't show in 2003, but we expect it to begin in 2004."

Until then, management said the company is working to improve sales through more consistent marketing and more advertising as it searches for a global and a national marketing chief.

The company's national advertising franchisee committee today is voting on whether to increase the ad budget for 2003.

"Hopefully by then we'll have our marketing positions at highest levels filled," Mr. Paull said, pointing to concurrent national and local messages that run on TV. "We have confused consumers with all the different messages we send at different levels. To the extent we send more of a national message well confuse consumers less."

New chicken sandwich
Analysts pressed for answers on why McDonald's was surprised by the success of its Grilled Chicken Flatbread sandwich and whether it would be added to the permanent menu. The company pulled advertising for the limited-time offer at the end of June after sales outpaced supply; ads for it were recently reinstated.

Despite being the most successful new product with women on its rotating menu, the company wants to see whether it can sustain sales over time or whether it will perform like McRib, which was very popular but sales would trail off in the fourth week. Executives also said it wants to better understand how the product would affect variety and operations.

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