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Yum's U.S. woes, other data, point to weakness at McDonald's

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By Lisa Baertlein

(Reuters) - Yum Brands Inc's disappointing Pizza Hut and Taco Bell results, along with other data, suggested the U.S. fast-food business remained weak in the second quarter and that industry leader McDonald's Corp continues to struggle.

The U.S. fast-food segment has lagged the broader restaurant sector, due to weak job growth and stagnant pay among the lower-wage diners who frequent such restaurants. The sector also is struggling to remain relevant as more consumers move away from decadent food like cheeseburgers and french fries to fresher, healthier fare.

"People want better food. Who loses? The fast-food guys are stuck," Investment Technology Group restaurant analyst Steve West said.

McDonald's, the world's biggest fast-food chain by revenue, has posted seven straight months of declines in U.S. sales at established restaurants.

The chain, which reports second-quarter results on Tuesday, recently transitioned from its "Dollar Menu" to the "Dollar and More" menu, effectively raising prices. That increased average checks but hurt traffic, West said.

Janney Capital Markets analyst Mark Kalinowski, who publishes a closely watched McDonald's franchisee survey, on Wednesday forecast a 2.6 percent drop in the chain's U.S. same-restaurant sales for June, the final month of the second quarter.

"Customers with jobs are not choosing McDonald's," said one of the 27 franchisees who participated in Kalinowski's survey. "When customers have money they choose others."

Kalinowski does not expect McDonald's woes to end in July. He forecast a 1.8 percent decline in July same-restaurant sales.

Worries are growing that overall U.S. restaurant industry sales did not bounce back from a dismal first quarter, when an Arctic blast of severe weather crushed results.

U.S. restaurant same-store sales rose just 0.3 percent in the second quarter, just a slight improvement from the 0.2 percent decline in the first quarter, said Wallace Doolin, chief executive at Black Box Intelligence, which tracks 19,000 restaurants.

"We were a little surprised. We thought Q2 would be stronger than it was," said Doolin, who added that the recovery in fast food was less robust than in the fast-casual segment dominated by burrito chain Chipotle Mexican Grill Inc.

Yum on Wednesday reported a 2 percent drop in second-quarter sales at established U.S. Pizza Hut restaurants, which continue to struggle.

"We now expect full-year operating profit at Pizza Hut to fall well short of our initial expectations," Yum Chief Executive David Novak said on a conference call with analysts on Thursday.

Taco Bell's same-restaurant sales grew a weaker-than-expected 2 percent, as heavy promotion of its national breakfast rollout distracted from lunch and dinner. Its new Cool Ranch Spicy Doritos Locos Tacos Chicken also flopped.

Taco Bell's results improved versus the prior quarter, but "were mixed in a challenging U.S. environment," Yum Chief Financial Officer Patrick Grismer said on the conference call.

(Reporting by Lisa Baertlein in Los Angeles; Editing by Meredith Mazzilli)

http://www.globalpost.com/dispatch/news/thomson-reuters/140717/yums-us-woes-other-data-point-weakness-at-mcdonalds