Stock Market Predictions

McDonald's growth defies volatile economy

Stock Market Predictions

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 United States more modern and inviting. That effort is boosting sales and making service faster and more efficient.

(For a graphic on McDonald's results, click link.reuters.com/xad64s)

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

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

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

McDonald's said sales at established restaurants in China were up 11.3 percent for the third quarter. KFC parent Yum Brands Inc (YUM.N), which is the No. 1 U.S. restaurant brand in the world's fastest-growing major economy, recently reported a 19 percent 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 United States.

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 (SBUX.O) 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 Global Markets I/B/E/S.

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

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

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

(Additional reporting by Brad Dorfman in Chicago; editing by Gerald E. McCormick, John Wallace and Matthew Lewis)