McDonald's sees costs climbing; shares down

By @ibtimes on

McDonald's Corp forecast higher food costs for 2011 and reported weaker-than-expected December sales at established European and U.S. restaurants as poor weather hurt demand.

Shares of the world's largest restaurant chain were down 60 cents, or .75 percent, in early trading on Monday, even as the company reported a fourth-quarter profit in line with expectations.

The company said its grocery bill -- what it pays for the 10 different commodities that account for around 75 percent of its food preparation costs -- is expected to rise this year 2 percent to 2.5 percent in the United States and 3.5 percent to 4.5 percent in Europe.

Europe and the United States are the two top markets for McDonald's.

Executives last year signaled that McDonald's could boost menu prices to offset higher food costs, and several analysts expect those to hit in 2011.

They will certainly try to pass on those costs, said Peter Jankovskis, co-chief investment officer with OakBrook Investments, which owns shares in McDonald's.

All restaurant operators will be under pressure to raise prices, and analysts said McDonald's size could work to its advantage.

They're going to attack it two ways. Jankovskis said. Certainly, they're large enough to put some pressure on their suppliers and they also will, through direct price increases or perhaps changing portion sizes, try to pass some of it on to consumers.

McDonald's has used spiffed-up restaurants, value menus and new food items to steal U.S. market share from rivals like No. 2 hamburger chain Burger King, which is now private after its sale to 3G Capital.

McDonald's, also known as the Golden Arches, had a banner year in 2010, with new menu items including espresso drinks and specialty beverages -- frappes and smoothies -- that boosted sales. However, last year's strong results have raised the bar for 2011 and some analysts worry that earnings-per-share growth could slow.

COLD WINTER

McDonald's said global sales at restaurants open at least 13 months rose 3.7 percent overall in December. They gained 2.6 percent in the United States, slid 0.5 percent in Europe and rose 8.9 percent for Asia-Pacific, Middle East and Africa.

Wall Street had expected December same-restaurant sales to be 3.9 percent higher in the United States, up 3.4 percent in Europe and gain 5.7 percent in APMEA, according to Janney Capital Markets analyst Mark Kalinowski.

In November, McDonald's same-restaurant sales rose less than expected in the United States and Japan.

Europe accounts for around 40 percent of McDonald's revenue, while the U.S. market contributes about 35 percent.

For January, the company expects global same-restaurant sales to increase 4 percent to 5 percent.

Net income in the fourth quarter rose to $1.24 billion, or $1.16 a share, compared with $1.22 billion, or $1.11 a share, in the year-earlier quarter. The profit matched what analysts polled Thomson Reuters I/B/E/S had expected.

Total revenue, including sales from company-owned restaurants plus royalties from franchisees and other fees, rose 4 percent to $6.21 billion, above the $6.20 billion analysts had expected.

McDonald's shares fell 60 cents to $74.41 in early New York Stock Exchange trading.

(Additional reporting by Ben Klayman; Editing by Derek Caney and Maureen Bavdek)

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