McDonald's warns of higher food inflation
LOS ANGELES/NEW YORK
LOS ANGELES/NEW YORK (Reuters) - McDonald's Corp (MCD.N) forecast higher prices for beef, dairy and other items and said it would cautiously raise prices to keep attracting diners, who are grappling with higher grocery and gas bills.
Shares fell 1.5 percent after the world's biggest hamburger chain said it planned to offset some, but not all, of its higher food costs, with small price increases throughout the year.
McDonald's results landed a day after rival Yum Brands Inc (YUM.N) reported strong China results that masked rising food and labor costs. Chipotle Mexican Grill (CMG.N), which has nearly all of its 1,100 restaurants in the United States, saw higher food costs eat into margins.
McDonald's and other restaurant operators are getting squeezed by accelerating food costs and must figure out how to raise prices without scaring away already skittish diners.
"It's very hard to pass through price increase right now," said Stifel Nicolaus analyst Steve West.
McDonald's Chief Executive Jim Skinner said customers are getting "pinched everywhere. They should not suffer the same fate at McDonald's."
Chief Financial Officer Pete Bensen said the company would sacrifice some short-term margin to protect long-term growth. He added that McDonald's has experience finding the right recipe for price increases in fragile economic times.
McDonald's now expects food costs to rise between 4 percent and 4.5 percent in the United States and Europe this year. That is up from its prior call for a rise of 2 percent to 2.5 percent in the United States and an increase of 3.5 percent to 4.5 percent in Europe.
McDonald's in March put through a 1 percent menu price rise in the United States, where it plans additional increases. Prices in Europe are up by the same amount and the company plans to raise prices in China.
When it comes to raising prices, West said McDonald's has an edge because it attracts a higher-income diner than other fast-food chains. It could have the best luck raising prices on things like premium burgers and McCafe drinks that appeal to those customers, he said.
After struggling during the recession, McDonald's has outperformed its fast-food peers by updating its menu to broaden its appeal beyond the young males that account for the biggest share of sales at most other fast-food chains.
"The bottom line is they're still doing a great job of growing revenue," said Peter Jankovskis, co-chief investment officer at Oakbrook Investments.
Analysts remain worried that high gas prices could force fast-food restaurant patrons to cut back. But Jankovskis said McDonald's was better equipped than others to cope.
McDonald's has roughly 32,700 restaurants around the world. The United States alone has 14,000 units, which means customers do not have to travel far to get to one.
"The big test will come in the summer months with gasoline remaining in the neighborhood of $4.00 (a gallon) -- that's when the strength of McDonald's will come through," he said.
March sales at restaurants open at least 13 months were up 3 percent in the United States, up 4.9 percent in Europe and gained 0.5 percent in McDonald's Asia/Pacific, Middle East and Africa unit. Asia results were adversely affected by the earthquake and tsunami in Japan, but that the impact on overall income was "minor," Skinner said.
First-quarter net income rose 10.9 percent to $1.21 billion, or $1.15 per share, topping analysts' profit view by a penny, according to Thomson Reuters I/B/E/S.
Total first-quarter revenue at the Golden Arches rose 9 percent to $6.1 billion, with sales in Europe leading the way.
Still, operating margin fell to 17.7 percent from 18.2 percent as costs for food and paper rose. Food and paper costs were 33.6 percent of sales in the quarter, compared with 32.9 percent a year earlier.
McDonald's shares fell 1.5 percent, or $1.17, to $76.23 in midday trading on the New York Stock Exchange.
(Editing by Maureen Bavdek and Gunna Dickson)
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