McDonald's 3Q profit boosted by Angus

Oct 22, 2009 (Chicago Tribune - McClatchy-Tribune Information Services via COMTEX) -- MCD | Quote | Chart | News | PowerRating -- McDonald's Corp. posted robust third-quarter results Thursday, with same-store sales and profits beating Wall Street estimates, pushing up the company's stock price.

Still, those strong third-quarter results were tempered by a weak forecast for U.S. sales in October, prompting some concerns among analysts, given the softness in the fast-food industry due to the weak economy.

"It was a really solid quarter all around," said Larry Miller, a stock analyst at RBC Capital Markets. "There's nothing bad in (McDonald's) report other than sales trends are slowing (in the U.S) in October."

Despite the weak U.S. forecast for this month, the Oak Brook-based fast-food giant said it expects overall global comparable sales to remain positive in October.

McDonald's stock closed the day at $59.50, up $1.17, or 2 percent. The stock traded as high as $60.60 Thursday morning before U.S. expectations for October were disclosed in a conference call with stock analysts.

McDonald's posted third-quarter earnings of $1.26 billion, or $1.15 per share, beating analysts average estimates by 4 cents per share and increasing from $1.05 per share a year ago. Revenues were $6.05 billion, down from $6.3 billion a year ago, and a bit short of analysts estimates due to currency fluctuations.

But Wall Street was more focused on McDonald's September same-store sales -- a key gauge -- which were up 5.1 percent, well above the 3.2 percent that was expected, according to a report by Miller.

And U.S. same-store sales in September rose 3.2 percent over the same month last year, above Wall Street's consensus estimate of 2 percent, and a solid bounce-back from McDonald's August showing of 1.7 percent.

"Given how tough the restaurant industry is, that's pretty darn good," said Jack Russo, a stock analyst at Edward Jones. The weak economy and rising unemployment have hurt fast-food sales this year, including at McDonald's.

Still, McDonald's has outperformed the rest of the industry, analysts say. "They are head and shoulders above their peer group," said RBC's Miller.

McDonald's core menu -- notably Big Macs and Quarter Pounders with Cheese -- coupled with new products, such as the one-third-pound Angus burger and McCafe coffee drinks, helped drive U.S. growth during the quarter, McDonald's Chief Executive Jim Skinner told analysts in a conference call.

The Angus, launched nationally in July, has "outperformed our projections," Skinner said. In addition, McDonald's Chief Operating Officer Ralph Alvarez told analysts that McCafe sales are meeting expectations.

The company said that U.S. coffee sales through September were up about 28 percen " (C) over the same time last year, and 94 percent of that increase was driven by hot and cold McCafe espresso-based coffee drinks.

McDonald's specialty coffee initiative, after starting as a regional rollout in 2006, was launched nationally in May. It's the key element of McDonald's biggest and riskiest new product platform in decades.

The black cloud in McDonald's quarterly report Thursday came when Skinner told analysts that he expected U.S. comparable sales in October to be flat to slightly negative. He blamed the economy and bad weather in some parts of the nation, which has slowed customer traffic.

Also, Skinner said that this October's U.S. sales comparisons will be matched against a particularly strong October last year. He said he didn't believe the October dip is the start of a long-term trend.

Still, that's what analysts worry about. "It is an issue in the sense that the big fear is that comparable sales will slow because the (restaurant) industry is contracting so much," said Raechel Rothman, a stock analyst at Wedbush Morgan.

With the weakness in the fast-food industry, promotional offers are growing, and some of McDonald's key rivals have taken direct aim at the burger behemoth, apparently looking to spark a burger war.

Burger King recently expanded its offer for a $1 double cheeseburger, about half of what the sandwich normally sells for. And to promote it, Burger King has unleased commercials belittling McDonald's double cheeseburger for its size.

McDonald's double cheeseburger, the company's best-selling U.S. sandwich, sells for $1.19 on average, and has a smaller meat patty than Burger King's burger.

Meanwhile, the Carl's Jr. and Hardee's chains, both owned by CKE Restaurants Inc., have in the past two months each launched burgers akin to McDonald's Big Mac, and promoted each in a similar way: Consumers get more beef for less money compared to McDonald's product.

During Thursday's conference call, an analyst noted that some competitors were "naming names" in such ads, and asked McDonald's executives, "How do you combat that?"

Skinner replied that "this is nothing new for us. . . . It's not unusual for our competitors to 'name names' regarding McDonald's." He added that McDonald's has had its well-trafficked dollar menu in place for at least seven years "and we have value across our menu."

mhughlett@tribune.com

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