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Meaghan Norman/MEDILL

McDonald's was a bright spot in an otherwise dim third-quarter earnings season. 

McDonald's profits super-sized in third quarter

by Meaghan M. Norman
Oct 22, 2008

Fast-food giant McDonald’s Corp. posted a better-than-expected 11 percent increase in profits in the third quarter despite a weakening global economy.

In the quarter ended September 30, the Oak Brook, Ill.-based company reported net income of $1.19 billion, or $1.05 per diluted share, up from $1.07 billion, or 89 cents per diluted share in the same period a year ago. Analysts surveyed by Thomson Reuters expected earnings of 98 cents a share.

“In spite of economic and financial concerns around the world, McDonald’s business is growing as we continue to be recession-resistant,” said CEO Jim Skinner.

Revenue rose to $6.27 billion from $5.9 billion in the year earlier period, an increase of 6.2 percent, and outstripping the consensus estimate of $6.19 billion. Comparable-store sales, or sales at restaurants open for 13 months or longer, rose 4.7 percent domestically and 7.1 percent globally.

Matt DiFrisco, a restaurant analyst for Oppenheimer & Co., said while sales were strong in the quarter, McDonald’s is not completely immune to the weakening global economy.

McDonald’s “is managing its costs. Labor was pretty strong in this quarter and [the company] topped its numbers versus the consensus,” DiFrisco wrote in a research note Wednesday. “The comp-sales on a relative basis were hanging in there. Though they are decelerating like everybody’s, they are still significantly positive across the globe.”

McDonald’s executives attributed the chain’s sales increases to an aggressive global strategy as well as its dollar menu, which has proven popular to strapped consumers.

“Our core menu continues to account for the majority of our sales while the dollar menu is effective in helping us grow traffic and maintain customer loyalty in these tough economic times,” Skinner said.

While the dollar menu is popular, Chief Operating Officer Ralph Alvarez hinted during a conference call with analysts that price increases may be in the offing. Alvarez said the menu will retain its name but will see some changes to reflect the increasing cost of ingredients.

“Commodity costs are one thing we don’t control but we are managing much better in this marketplace today than others,” said Alvarez. “You can’t raise the price on everything else and leave the dollar menu untouched.”

Skinner said he is confident that the third quarter was a good indicator of gains for the remainder of the year. He added the company has seen marked growth over the past nine months with the introduction of new products, such as the Southern Style Chicken sandwich and $1 Sweet Tea.

In the nine months ended September 30, revenue rose 5 percent to $17.9 billion from $17.0 billion in the same period of 2007. Net income jumped 23 percent to $3.3 billion, or $2.89 per diluted share, from $2.7 billion,or $2.22 per diluted share a year ago.

Shares of McDonald’s, which were higher for most of the session Wednesday, succumbed to broader market weakness to close at $54.30, down 83 cents or 1.51 percent.