New York: McDonald’s Corp reported a higher-than-expected quarterly profit on Thursday as the world’s largest restaurant company posted March sales that topped analyst expectations.
But the company’s profit margin took a hit because of rising food and paper costs, and it increased its inflation forecasts.
It said it now expects food costs to rise between 4 and 4.5% in the United States and Europe this year. In January, McDonald’s said it expected its food costs to rise 2% to 2.5% this year in the United States and 3.5% to 4.5% in Europe.
Its shares slid 1.5% to $77.25 in premarket trading.
McDonald’s has been on a great run -- outperforming most other US restaurant chains and taking market share from smaller rivals amid a slow US economic recovery.
After struggling during the recession, McDonald’s has outperformed its fast food peers by innovating its menu. The company pointed to its McCafe menu as a source of the sales gains.
“The bottom line is they’re still doing a great job of growing revenue,” said Peter Jankovskis, co-chief investment officer at Oakbrook Investments in Lisle, Illinois. The firm owns McDonald’s shares.
Analysts remain concerned about high gas prices which could prompt fast-food restaurant patrons to cut back. But Jankovskis said McDonald’s was better equipped than others.
“The big test will come in the summer months with gasoline remaining in the neighborhood of $4-that’s when the strength of McDonald’s will come through.”
McDonald’s results come a day after rival Yum Brands Inc reported better-than-expected sales due to strength in China. Chipotle Mexican Grill, which has virtually all of its 1,100 restaurants in the United States, saw higher food costs eat into margins.
McDonald’s said total revenue during the first quarter that ended 31 March rose 9% to $6.1 billion, with sales in Europe leading the way.
March sales at restaurants open at least 13 months were up 3% in the United States, up 4.9% in Europe and gained 0.5% in McDonald’s Asia/Pacific, Middle East and Africa unit. Globally they rose 3.6%.
Analysts, on average, were looking for same-restaurant sales to rise almost 2% in the United States, more than 3% in Europe and 2% in APMEA. Sales in Asia may have been pinched by the disasters in Japan.
The United States contributes just over one-third of McDonald’s overall revenue, compared with 40% for Europe -- its largest market for sales and one where it has more middle-class appeal.
First-quarter net income rose 10.9% to $1.21 billion, or $1.15 per share, from $1.09 billion, or $1 per share, a year earlier. That beat Wall Street expectations of a profit of $1.14 per share, according to Thomson Reuters I/B/E/S.
But operating margin fell to 17.7% from 18.2% as costs for food and paper rose. Food and paper costs were 33.6% of sales in the quarter, compared with 32.9% a year earlier.