* Q1 profit $1.15 per share vs Street view $1.14
* Sees more food inflation in United States, Europe
* Plans small price increases this year
* Will sacrifice some margin to protect traffic
* Shares down 1.5 percent
(Adds analyst comment, updates shares)
By Lisa Baertlein and Phil Wahba
LOS ANGELES/NEW YORK, April 21 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
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. [ID:nN24223102].
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)