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 percent in the United States and Europe this year. In January, McDonald's said it expected its food costs to rise 2 percent to 2.5 percent this year in the United States and 3.5 percent to 4.5 percent in Europe.

Its shares slid 1.5 percent to $77.25 in premarket trading.

McDonald's has been on a great run -- outperforming most other U.S. restaurant chains and taking market share from smaller rivals amid a slow U.S. 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. (http://graphics.thomsonreuters.com/11/04/US_MCDYUM0411_SC.gif)

McDonald's said total revenue during the first quarter that ended March 31 rose 9 percent to $6.1 billion, with sales in Europe leading the way.

March sales at restaurants open at least 13 months were up 3 percent in the United States, up 4.9 percent in Europe and gained 0.5 percent in McDonald's Asia/Pacific, Middle East and Africa unit. Globally they rose 3.6 percent.

Analysts, on average, were looking for same-restaurant sales to rise almost 2 percent in the United States, more than 3 percent in Europe and 2 percent 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 percent for Europe -- its largest market for sales and one where it has more middle-class appeal.

First-quarter net income rose 10.9 percent 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 percent from 18.2 percent as costs for food and paper rose. Food and paper costs were 33.6 percent of sales in the quarter, compared with 32.9 percent a year earlier.

(Reporting by Phil Wahba and Lisa Baertlein; Editing by Maureen Bavdek)

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