McDonald's Plans to Keep Its Discounting Strategy

Investors hoping for a stalemate in the burger price wars are likely to be disappointed by a McDonald's (MCD Quote - Cramer on MCD - Stock Picks) conference call later this week.

The fast-food giant has confirmed that it isn't going to move away from its discounting strategy, when its new chief executive officer, Jim Cantalupo, addresses investors on Thursday. "We have no plans to make any changes with regard to the dollar menu," said Bill Whitman, a McDonald's spokesman.

In October, McDonald's introduced its dollar menu, which features two of its premium offerings, the McChicken and Big 'N Tasty Hamburger, in order to entice customers and lift slumping sales. The decision pressured other rivals in the fast-food industry to lower prices on some of their most popular items. Most recently Burger King, a unit of Diageo (DEO Quote - Cramer on DEO - Stock Picks), put its flagship Whopper on sale for 99 cents in January.

The price war has raised concern among analysts, because of its negative effect on industry margins.

"It is clear that McDonald's discounting activity -- the dollar menu instituted early in the fourth quarter -- is not only hindering the Golden Arches' financials but the entire fast-food sector's health," said Mark Kalinowski, an analyst at Salomon Smith Barney, in a research report in December.

In December, McDonald's said it would report its first-ever loss in the fourth quarter. The company said it expected profit margins during the period to be below the comparable period last year. McDonald's reports earnings on Jan. 23.

Elsewhere, Jack in the Box (JBX Quote - Cramer on JBX - Stock Picks) lowered its earnings estimate for its fiscal first quarter to 55 cents a share from a previous forecast of 63 cents in December, in part as a result of increasing competitive activity in the industry.

"I think McDonald's needs to make menu changes," said Ann Gurkin, an analyst at Davenport & Co.

Apparently, McDonald's disagrees. In fact, the fast-food giant plans to continue to advertise the dollar menu, which includes other items such as a small order of fries and a 21-ounce drink, in 2003.

"I am not sure who is having difficulty with value," said Whitman of McDonald's. "Our customers are appreciative of it, particularly when they have the ability to get two premium sandwiches for a dollar."

McDonald's closed down 2% at $16.96 on Tuesday. The stock is off 45% from its 52-week high.