McDonald's May sales up but sees euro drag on profit

LOS ANGELES/DETROIT Tue Jun 8, 2010 12:30pm EDT

A man carries his food as he leaves a McDonald's restaurant in Arlington,Virginia, July 23, 2009. REUTERS/Jim Young

A man carries his food as he leaves a McDonald's restaurant in Arlington,Virginia, July 23, 2009.

Credit: Reuters/Jim Young

LOS ANGELES/DETROIT (Reuters) - McDonald's Corp (MCD.N) reported a stronger-than-expected 4.8 percent rise in worldwide May sales at established restaurants, but said it expects a weak euro to take a bite out of full-year profits.

Roughly a quarter of McDonald's consolidated operating income originates in countries that use the euro currency, the world's biggest hamburger chain said on Tuesday.

Based on current exchange rates, McDonald's expects currency conversion to hurt full-year net income per share, versus its previous expectation for a slight benefit. The company, which gets more than half of its revenue and profits from outside the United States, gave no further details.

On Tuesday, the euro hovered near a four-year low against the dollar on concerns over a widening European debt crisis that has struck financial markets and could constrict consumer demand.

The currency fluctuations have been "wild and crazy" since McDonald's last gave currency guidance in April, Edward Jones analyst Jack Russo said.

He said the risks now are two-fold: Possible austerity measures around Europe could put a dent in consumer spending, and the strong U.S. dollar hurts reported earnings and sales.

McDonald's rival Burger King Holdings Inc BKC.N on Monday said unfavorable exchange rates, primarily tied to the euro, would cut earnings for the current quarter 1 to 2 cents a share.

However, McDonald's does not expect the weak euro will hurt results for its second quarter, which will end June 30. May sales at McDonald's restaurants open at least 13 months rose 3.4 percent in the United States and 5.7 percent in Europe.

Analysts, on average, had called for a 4 percent overall rise in May same-store sales, fueled by a 4.3 percent gain in the United States, and a 3.4 percent rise in Europe.

MCCAFE BOOST

While U.S. growth fell short of analysts' view, it outpaced results from other fast-food chains and was powered by the expansion of McCafe drinks and the popularity of products associated with the launch of the movie "Shrek Forever After."

"McDonald's, of the top seven burger brands in the country, is the only one reporting meaningfully positive same-store sales," said Janney Montgomery Scott analyst Mark Kalinowski.

Last week, McDonald's recalled at least 13.4 million "Shrek"-themed drinking glasses in the United States and Canada due to the presence of the toxic metal cadmium in the designs. The company is now offering $3 refunds to customers who bought the recalled glasses.

Sales growth in Europe was driven by France, Germany, Britain and Russia. Europe contributed 41 percent of McDonald's overall revenue last year -- more than any other region -- and business there has benefited from longer operating hours and restaurant renovations.

Bane Knezevic, head of McDonald's Germany, told Reuters that consumer sentiment in Europe's economic powerhouse has picked up after a harsh winter and economic slump. But the German government's plans to cut spending and rein in deficits could dampen sentiment.

"It is still a bit early to say how consumers will react," Knezevic said. While he expects some negative effect in the months ahead, he said, "it won't be big."

Shares in McDonald's rose 0.6 percent to $67.17 in late morning trading. Burger King, which counts Germany as its largest international market, saw its shares fall 0.1 percent.

CHINA SHINES

May same-store sales rose 3.8 percent in the Asia/Pacific, Middle East and Africa (APMEA) region due to strength in Australia and China, better than the 3.1 percent increase analysts had expected.

McDonald's had nearly 8,500 restaurants of its 32,500 global restaurants in that APMEA region, which contributed nearly 20 percent of its revenue in 2009. Australia, China and Japan accounted for more than 50 percent of APMEA's revenue.

The Golden Arches, as the company is known, plans to double its China network to more than 2,000 outlets by 2013.

Yum Brands Inc (YUM.N) has more than 3,500 restaurants in China, a bigger presence than any other U.S. operator. Shares in Yum were up 1.0 percent.

Year-to-date through Monday, McDonald's shares were up 7 percent, compared with a 3 percent fall in Burger King shares and a gain of almost 14 percent in Yum stock.

(Reporting by Ben Klayman in Detroit, Lisa Baertlein in Los Angeles and Christian Kraemer in Munich; editing by Michele Gershberg and Gerald E. McCormick)

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