McDonald's Earnings Eve: Beanies and Bargains

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By Louise Kramer
Staff Reporter

Call it the

Teenie Beanie Baby

effect.

The public's craving for the adorable stuffed critters has been so intense at

McDonald's

(MCD) - Get Report

that company watchers say it's hard to assess the initial performance of the burger giant's new value strategy,

Campaign 55

. The chain started offering the toys with

Happy Meals

last week and has now the TBBs are about sold out -- five weeks sooner than expected.

When McDonald's releases first-quarter earnings -- expected Thursday -- they won't reflect results from these whopper-sized attempts to drive more traffic into the company's approximately 12,000 U.S. restaurants, which have had six straight quarters of declining comparable-store sales.

That U.S. losing streak may be coming to an end, though no home runs are expected for the $31.8 billion global company. Officials said earlier this month, as reported in

The Street

, that comparable-store sales were up about 1% for the quarter ended March 31 compared with the same quarter a year ago.

First Call

pegs earnings at 50 cents per share, an estimate that was revised 2 cents downward when news of Campaign 55 first hit the Street. The stock closed at 50 3/8 on Wednesday, a 52-week high.

With a focus on breakfast, Campaign 55 hit stores April 4, 11 months after the introduction of

Arch Deluxe

, the adult-targeted burger that failed to spark significant sales jumps. Lunch comes next week. Sandwiches cost 55 cents, but only if you add on high-margin french fries and a drink. If you hanker only for a Big Mac, you've got to pay retail.

Paul Westra of

Salomon Brothers

, who has maintained a strong buy recommendation for McDonald's since early 1995, says he can't tell yet if Campaign 55 is a winner. "We don't have that data," he says. "My impression is that McDonald's same-store sales seem to be materially positive. It is a continuation of the momentum of chicken nuggets and

Monopoly

," he says, referring to recent promotions. Salomon hasn't been involved in any recent underwriting for the burger giant.

Peter Pifer, a McDonald's franchisee in Springfield, Ore., says Campaign 55 is attracting customers, but he couldn't say how it's affecting sales. "You have to factor in the Beanie Baby influence," he says. "Business has been good this quarter," he adds, "but it's never as great as you want."

Pifer says the toys -- McDonald's ordered 1 million from closely held

Ty Inc.

-- are not money-makers. "The profit is in the happy child," he notes.

Campaign 55 hasn't sparked feared price wars in the cutthroat burger segment, at least not yet. Bryan Applefield, a franchisee of 25

Burger King

restaurants, says his breakfast business is unscathed by the value campaign. But the Dothan, Ala.-based Applefield says he's keeping close tabs. "Everyone is sort of wondering when the rest of the program comes together exactly what it's going to mean or not mean," he says. "If you're not concerned, you've got to be brain-dead."

It's too soon to see counterattacks, Applefield adds. "When you have a 500-pound gorilla like McDonald's, a lot of folks feel that to try to arm-wrestle initially is not really prudent," he says. "Let them have their moment in the sun, and then let's go back and do our basics and maybe have some programs."

McDonald's, one of 30 component companies in the

Dow Jones Industrial Average

, has been maintaining investor interest in the past few bumpy weeks. Since late last month, it's outperformed the Dow, the

S&P 500

and rival

Wendy's International

(WEN) - Get Report

, the nation's third-largest burger chain.

Two funds that bought McDonald's in 1993 are sticking with it for the long haul. "It's been a holding that obviously hasn't performed wonderfully over the last year, but we are long-term believers in the international brand name that McDonald's has," says Russell Wiese, a spokesman for the $4.2 billion

Davis New York Venture Fund

(NYVTX) - Get Report

. "And it's one of the ways we believe you can own a U.S.-based multinational company."

The fund has a $92 million stake in McDonald's.

Rittenhouse Financial Services

, which has some $5 billion of its $7 billion under management in equities, in August 1993 sold its holdings in

Kimberly-Clark

(KMB) - Get Report

and scooped up about 5 million shares of McDonald's for about $26 each. It's sticking with the burger chain for now, says investment officer Todd Keating.