McDonald's pricing power in focus with first quarter results

By @ibtimes on

McDonald's power to raise prices as food and fuel costs climb will be in focus on Thursday when the world's biggest hamburger chain reports quarterly results.

The spotlight will be on its business in the United States, where gasoline prices are flirting with $4 per gallon and threatening to curtail spending on meals away from home.

Analysts expect McDonald's to report a nearly 2 percent rise in March sales at established U.S. restaurants. That would be on top of a gain of 4.2 percent in March 2010, when the introduction of McCafe drinks boosted results.

I think we're right on the cusp of seeing the gas impact, Morningstar analyst R.J. Hottovy said. The real question is whether this will change their pricing strategies for the year.

On Wednesday, 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.

Stifel Nicolaus analyst Steve West predicted that McDonald's would have success pushing through small price increases on pricier menu items, such as premium sandwiches and McCafe drinks, because they appeal to relatively higher income diners who are less affected by higher prices at the pump.

McDonald's has been on a great run -- outperforming most other U.S. restaurant chains and stealing share from smaller rivals amid a slow U.S. economic recovery. Because of that, weakness of any kind tends to spark stock sell-offs.

They've been doing so well for so long that when there's any kind of weakness they get hit, West said. They're a victim of their own success.

The United States contributes just over one-third of McDonald's overall revenue, compared with 40 percent for Europe -- its largest market for sales.

McDonald's has a more middle-class appeal in Europe, making restaurant patrons there a bit less sensitive to rising gasoline costs than their U.S. counterparts.

Analysts are looking for a gain of just over 3 percent in Europe's March sales at restaurants open at least 13 months.

Europe's monthly same-restaurant sales results so far this year have helped to ease worries that government austerity measures in the region would bite into demand.

Analysts expect McDonald's Asia/Pacific, Middle East and Africa unit, which contributes just over 20 percent of revenue, to rise 2 percent. They also are looking for an update on the effects of the earthquake and tsunami in Japan.

(Editing by Bernard Orr and Muralikumar Anantharaman)

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