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October 25, 2014

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McDonald’s plans ‘Fish McBites’ to boost sales

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Delen Goldberg

McDonald’s in the plaza between Harrah’s and Casino Royale

McDonald's used the Dollar Menu to help lift its profit in the latest quarter. Now the world's biggest hamburger chain is turning to a pipeline of new menu items to boost slumping sales, starting with "Fish McBites."

The Oak Brook, Ill.-based company is betting that it will be able to beat back intensifying competition and economic pressures with the lineup, which executives said includes new burgers, chicken entrees and breakfast offerings that are performing well in test markets. The Fish McBites, which will come in three sizes and use the same Alaskan pollock used in the Filet-O-Fish, are set to be launched as a limited-time addition in February.

The stepped up offerings come after McDonald's managed to eke out a higher profit for the October-to-December period with a series of short-term maneuvers, such as touting its Dollar Menu, pushing back the two-week availability of its popular McRib to the second half of December when sales comparisons from a year-ago were tougher, and urging franchisees to stay open on Christmas.

In November, the company ousted the president of its U.S. business after a key sales figure dropped for the first time in nearly a decade. Without providing details, CEO Don Thompson said Wednesday that the figure is expected to fall again in January.

"By no means do we think 2013 is going to be an easy year," Thompson said in a conference call with analysts. He noted that growth in the restaurant industry has been relatively flat-to-declining around the world, with that trend expected to continue.

In addition a more "robust" pipeline of new products, McDonald's executives said they'll boost sales by continuing remodeling efforts and extending store hours around the world.

Although McDonald's said it increased its U.S. market share this past year, the chain is facing tougher competition from traditional rivals such as Burger King, Taco Bell and Wendy's, which have been revamping their menus and posing a bigger threat. In addition, people are increasingly heading to eateries such as Chipotle and Panera that offer higher-quality food for slightly higher prices. To help keep its menu fresh in the face of such competition, McDonald's has said that it plans to increase the frequency of its limited-time offerings.

For the October-to-December period, McDonald's said sales at restaurants open at least a year rose 0.1 percent globally and 0.3 percent in the U.S. But in Europe, McDonald's biggest market, the figure fell 0.6 percent as guest counts declined. It fell 1.7 percent in the region encompassing Asia, the Middle East and Africa.

In China, where the figure fell 0.9 percent, McDonald's downplayed the effect of recent public concerns over its chicken suppliers. Yum Brands Inc., which owns KFC, has said it expects its sales in the region to fall 6 percent, in part because of the issue.

The figure is an important measure of a restaurant chain's performance because it strips out the impact of newly opened and closed locations.

Howard Penney, a restaurant analyst for Hedgeye Risk Management, questioned McDonald's recent emphasis on value and noted that operating profit margins fell globally for the quarter. When sales are up but margins are down, that means "you're giving away food," he said.

Moving forward, however, the company said it didn't plan to add many items to its Dollar Menu unless they are more profitable items, such as the cheddar grilled onion burger that was introduced in December.

McDonald's Corp., based in Oak Brook, Ill., said it earned $1.4 billion, or $1.38 per share, for the quarter. That compares with $1.38 billion, or $1.33 per share, a year ago.

Revenue rose to $6.95 billion, up from $6.82 billion.

The results topped expectations for profit of $1.33 per share on revenue of $6.9 billion.

In the year ahead, the company expects costs for ingredients to rise 1.5 percent to 2.5 percent. Labor costs will also continue pressuring profit margins, executives said.

Thompson, who took over as CEO this summer, said the company continues to target total sales growth of 3 percent to 5 percent over the long term. McDonald's plans to open between 1,500 and 1,600 restaurants this year. It currently has about 34,000.

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