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New menu boosts McDonald’s Q3 profits

New York, October 22, 2011

McDonald's Corp reported a higher-than-expected third-quarter profit as new menu items and renovations lifted sales during a summer of extreme economic volatility, and its shares rose nearly 3 per cent.

The world's biggest restaurant company and its franchisees have been investing in the business at a time when diners are reacting to economic volatility by carefully managing their spending. The strategy has helped McDonald's win market share from rivals that are smaller and have less financial heft.

By adding Dollar Menu items and introducing high-margin beverages such as coffee and fruit smoothies, McDonald's has broadened its appeal beyond the young men who account for the biggest share of sales at most other fast-food chains.

The company, which also has accelerated its global expansion, has been making its restaurants in Europe and the US more modern and inviting. That effort is boosting sales and making service faster and more efficient.

Sales at established restaurants rose 6.6 per cent in September. That was nearly twice the gain analysts expected and landed amid debt woes in Europe, stubbornly high unemployment in the US and worries about slower growth in China.

U.S. same-restaurant sales rose 5 per cent, while Europe was up 6.9 per cent and Asia/Pacific, Middle East and Africa had a 6.8 per cent increase.

The company forecast a 4 to 5 per cent increase in sales at established restaurants in October.

McDonald's said sales at established restaurants in China were up 11.3 per cent for the third quarter. KFC parent Yum Brands, which is the No. 1 US restaurant brand in the world's fastest-growing major economy, recently reported a 19 per cent gain in same-restaurant sales.

Strong September results from Europe, especially Germany, helped allay fears that austerity measures would pummel demand in the region, said Lazard Capital Markets analyst Matthew DiFrisco.

McDonald's 'continues to evolve into more of a staple than a discretionary brand,' said DiFrisco, adding that the company also turned in solid results from the US.

The company nudged up its forecast for food and other costs, but DiFrisco said this was no cause for concern.

'They are managing their costs and margins in an environment where commodity costs are still heady,' he said.

Balancing act

'Consumers everywhere continue to be cautious and hesitant to spend,' chief executive Jim Skinner said on a conference call with analysts.

Restaurant operators of all stripes are grappling with higher costs for beef and other ingredients. McDonald's has raised menu prices to take some of the sting out of that hit, but said it would weigh future increases carefully.

'We are very judicious about price increases because maintaining everyday affordability, particularly in the environment that we are in today, is paramount,' chief financial officer Peter Bensen said on the conference call.

'They seem to be listening to their customers,' said Michael Yoshikami, founder and CEO of YCMNET Advisors.

McDonald's customers wanted things like healthier kids' meals, good coffee that was cheaper than at Starbucks Corp and premium hamburgers. The company delivered on those demands and now is reaping the benefits, Yoshikami said.

Third-quarter net income rose to $1.51 billion, or $1.45 per share, from $1.39 billion, or $1.29 per share, a year ago.

Analysts on average had forecast $1.43 a share, according to Thomson Reuters I/B/E/S.

Earnings per share rose more than 12 per cent but were up only about 6 per cent excluding foreign currency benefits.

Revenue rose 13.8 per cent to $7.17 billion. Sales at established restaurants were up 5 per cent globally in the quarter, with increases of 4.4 per cent in the United States, 4.9 per cent in Europe and 3.4 per cent in the Asia/Pacific, Middle East and Africa region.

McDonald's shares were up 2.9 per cent at $91.57 in afternoon trading on the New York Stock exchange. – Reuters

Tags: profits | McDonald’s | Third quarter | New menu |

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