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McDonald's Posts Higher Sales, Profit

24 Oct 2011

McDonald's Corp.'s third-quarter earnings rose 8.6% as the fast-food giant's continued sales gains helped compensate for higher-than-expected food cost inflation.

The Oak Brook, Ill., restaurant chain has consistently outperformed fast food rivals with competitive pricing that attracts consumers in this volatile economy.

Even after raising menu prices this year in light of its higher costs, the chain has still been able to boost customer visits and grow sales faster than most of its competitors.

For the third quarter, global same-store sales, or sales at restaurants open at least 13 months, rose 5%, with a 4.4% boost in the U.S., 4.9% in Europe and 3.4% in the Asia Pacific, Middle East and Africa division.

Chief Executive Jim Skinner said the company's better-than-expected results were "hard-won."

"We are officially out of the recession, but it hardly feels that way," he said. "Consumers everywhere continue to be cost conscious and hesitant to spend."

He said global same-store sales remain strong at the beginning of the fourth quarter, and the company expects a between 4% and 5% rise this month.

McDonald's shares reached an all-time high in premarket trading Friday and were recently up 2.3% to $91.36. The company's shares are up 16% this year through Thursday's close.

McDonald's reported a profit of $1.51 billion, or $1.45 a share, up from $1.39 billion, or $1.29 a share, a year earlier. Foreign currency translation boosted its third quarter earnings by eight cents a share.

Revenue rose 14% from a year ago to $7.17 billion. Excluding currency fluctuations, revenue was up 8%. Analysts polled by Thomson Reuters had expected earnings of $1.43 a share on revenue of $7.03 billion.

McDonald's profit gain comes as the company faces higher costs, especially for beef, as those prices didn't moderate after the summer grilling season like McDonald's had hoped.

As a result, it raised its commodity inflation outlook to between 4.5% and 5% from 4% to 4.5% in the U.S. and Europe for the year, as higher food costs pressure restaurant margins industry-wide.

An increasingly diverse menu—ranging from value offerings to higher-margin products like blended-ice drinks—has contributed to its strong sales and helped offset its rising costs. McDonald's also implemented two rounds of U.S. menu price increases this year, averaging 1% in March and 1.4% in May, to further offset food inflation.

Still, McDonald's bottom line was hit in the third quarter, as its company-owned restaurant margin decreased by one percentage point to 20% because strong same-store sales were more than offset by higher commodity costs.

"We will continue to evaluate additional price increases in light of this inflationary environment, always balancing our goal of driving traffic and market share gains with managing impact of rising costs," said Chief Financial Officer Peter Bensen.

McDonald's expects 2012 commodity inflation in the U.S. to be about the same as this year.

Grocery store prices are rising faster than restaurant prices, which might allow McDonald's to increase its menu prices again in the near-term without turning away consumers, Mr. Bensen said.

Mr. Skinner added that McDonald's pricing plans are "an inside game," not determined by moves its competitors make.

"We have a pricing model that we use very, very effectively," Mr. Skinner said. "And yet it takes intuition and a gut feeling of that when to pull the trigger on these kinds of things."

Source- The Wall Street Journal