McDonald's 1Q Profits Jump Despite Euro Zone Woes

McDonald's Corp., the world's biggest restaurant chain, (NYSE: MCD) said Friday stronger sales produced higher a first-quarter profit increase that met Wall Street expectations. Shares rose more than 2 percent.

The Oak Brook, Ill., company reported a net income of $1.27 billion in the quarter ended March 31, or $1.23 per share, up from a net income of $1.21 billion, or $1.15 per share, during the same quarter last year. The results matched analysts' and the company's own expectations.

Operating income increased 8 percent, to $1.96 billion from $1.83 billing in the year-ago period.

Revenue was up 7 percent, to $6.55 billion, from $6.11 billion a year ago.

Comparable store sales increased 7.3 percent in March, down from February's 7.5 percent increase, which was bolstered by an extra day due to the leap year.

Sales in Europe were a primary concern, as the continent endured a tumultuous economic stretch, yet McDonald's saw European sales increase 5 percent.

Analysts anticipated a higher first-quarter profit with a mild U.S. winter boosting foot traffic, as thinning wallets drove consumers to cheaper food options and the latte-and-laptop crowd bought more high-margin specialty drinks.

We've got some very favorable weather that tends to draw people out more, said Steve West, a restaurant analyst for ITG, an investment firm in New York, ahead of the earnings report. The fast food companies will get much more of the weather benefit than the casual dining companies.

Sputtering economic growth left consumers cost conscious, sending many to eat at restaurants a tier below their preferences, to McDonald's benefit, said Rachael Rothman, an analyst in Susquehanna International Group's New York office.

McDonald's shares fell 2.23 percent during the quarter. The shares hit a quarterly high of $101.74 on Jan. 20, but closed the three-month period at $98.10.

The wildcard in gauging McDonald's quarterly results remained Europe's recession, which some analysts feared could cut revenue from the continent. Overseas operations account for half of McDonald's profits, with 40 percent coming from Europe.

I think investors are most concerned about Europe, given the austerity measures and economic uncertainty. The fear is that Europe will slow, Rothman said. Good results will give people comfort that [McDonald's] business model operates in all economic environments.

McDonald's has been increasing market share in the fast-casual/coffeeshop sector, mirroring Starbucks with a wide variety of high-margin morning drink variations such as the McCafe. Coupled with free Wi-Fi and intense advertising, West argued the Golden Arches could successfully co-opt a substantial chunk of the laptop-and-latte crowd.

McDonald's continues to transform themselves into a fast casual or coffeeshop concept, he said, noting the company's broad customer base of varying levels of affluence.

There were some headline-grabbing moments during the last quarter, such as the discovery of pink slime, meat bits processed and blanched in ammonium hydroxide, which McDonald's quickly disavowed. But the episode had little to no impact on the brand's image, Rothman said.

What we know from past experiences with all of our strong companies, with avian flu, mad cow or ecoli, these things pass, she said.

The company also saw a legal headache subside, as a California judge threw out a proposed class action lawsuit that would have removed toys from Happy Meals.

The tumultuous economic picture mirrors a quarter that saw some substantive changes within the corporate confines of the Golden Arches. Long-serving CEO Jim Skinner announced his retirement in March, with current Chief Operating Officer Don Thompson as his designated successor, with a July 1 start date.

The Golden Arches menu remained largely unchanged during the first quarter, barring the addition of popcorn chicken -- a derivation of the McNuggets staple.

McDonald's rose $2.30, or 2.4 percent, to $97.55 in midday trading.