Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=163384
Story Retrieval Date: 5/23/2013 4:37:36 AM CST
McDonald’s Corp., based in Oak Brook, Ill., reported an 11 percent increase in profit due to augmented global operations and expansion into premium beverages, exceeding Wall Street’s expectation by 4 cents.
The fast food giant earned nearly $1.1 billion, or $1 per diluted share, in the first quarter ended March 31, up from $980 million, or 87 cents per diluted share, in the year-earlier period. Amplified earnings came from increased customer counts especially for breakfast, rising popularity of McDonald’s dollar menu, and the company's continued expansion into the premium beverage market.
Total global sales increased 10 percent to $5.61 billion from $5.08 billion in the prior-year period. There has been "tremendous growth" in McCafe coffee sales, as espresso-based coffees at McDonald’s have more than doubled since the first quarter 2009, said CEO James Skinner in Wednesday’s conference call. Skinner said breakfast traffic is increasing substantially as well.
Sales of comparable stores, those in operation at least 13 months, increased 4.2 percent, with European sales up 5.2 percent and U.S. sales up 1.5 percent. Sales in Asia/Pacific, Middle East and Africa were up 5.7 percent.
“It looks like they are continuing to outperform and grow comps globally in a still very challenging market,” said analyst Mitchell Speiser of Buckingham Research Group.
Driving sales in McDonald’s international markets, especially Japan and Australia, was an increased focus on convenience and customer satisfaction, according to Skinner. Stronger margins and “beefing up infrastructure” in stores worldwide, including expansions of drive-throughs in Asia/Pacific, contributed to McDonald’s success in the quarter, Skinner said.
McDonald’s margins rose due to a decrease in commodity prices, as the basket of goods decreased about 5 percent in the U.S. during the quarter, compared with a nearly 7 percent increase during the same period last year, said Peter Bensen, chief financial officer, in the conference call.
Bensen also attributed McDonald’s amplified earnings to its value menu, which offers 11 breakfast and lunch items for $1 each, and its continued expansion into the beverage market. He said the company plans to launch heavy marketing in the next few months for its new frappes and fruit smoothies for summer. The frappes are currently in about 9,000 restaurants so far, with greater performance than expected prior to the marketing launch. Smoothies are available in select restaurants, about 2,000 across the U.S., and are outperforming already in Michigan stores, according to Bensen.
Speiser said he was pleased with McDonald’s earnings this quarter, and that he has a positive outlook on the year ahead with the launch of frappes and smoothies.
“They’re working hard . . . being proactive, they’re not just resting on their laurels,” Speiser said.
The fast food restaurant chain, which operated nearly 32,500 restaurants (including franchises) in 117 countries as of December, has traditionally served foods widely perceived as unhealthy. However, since 2003 McDonald’s has “really reformulated its menu” to include more health-conscious offerings like grilled options, salad and fruit, said Edward Jones analyst Jack Russo, who gives the stock a hold rating. “They’re trying to get with the times and offer consumers what they want.”
Executives said 2,000 locations will get a makeover this year, upgrading exteriors and interiors to reflect a more contemporary look and feel. Russo said he thinks this is a wise investment, as a remodel will typically increase a store’s sales by about 5 percent.
“Overall the fast food category is flat, but they are still growing,” Speiser said. “It’s not just the category that is taking their numbers higher; they’re really bucking the trend.”
The stock closed at $70.35, up 1 cent.