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VOL. 127 | NO. 143 | Tuesday, July 24, 2012

McDonald's Showing Signs of Tear From Economy

CANDICE CHOI | AP Food Industry Writer

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NEW YORK (AP) – Not even McDonald's Corp. has an iron stomach when it comes to the global economic downturn.

The world's largest hamburger chain has thrived in boom and bust times by selling cheap eats and constantly updating its menu with popular items such as fruit smoothies and snack wraps. But the company is starting to show signs of wear and tear from global economic pressures, intensifying competition and penny-pinching customers who are eating out less often in some hard-hit regions around the world.

The Oak Brook, Ill.-based company said Monday that its net income fell 4 percent in the second quarter as a strong dollar ate into results.

When the dollar is strong, international sales translate into fewer dollars back at home. That's problematic for McDonald's, which does two-thirds of its business overseas. Making matters worse, the dollar hit a two-year high against the euro Monday amid ongoing fears that Spain may need a government bailout.

McDonald's is also facing higher costs for labor and ingredients, although it said it now expects commodity costs to rise between 3.5 percent and 4.5 percent for the full year, down from the previous forecast of up to 5.5 percent.

Suggesting more challenges ahead, McDonald's said global sales at restaurants open at least a year rose 3.7 percent for the three months ended June 30. The figure, which is a key metric because it strips out the impact of newly opened and closed locations, represents the slowest growth since the company reported sales growth of 2.3 percent in the fourth-quarter of 2009.

"We've been in situations like this before," CEO Don Thompson said in a conference call with investors, noting that the company will draw on its past experiences in the past to navigate the current challenges.

In a note to investors, Janney analyst Mark Kalinowski pointed out that the company was nevertheless able to deliver relatively strong overall growth at a time of economic uncertainty as a result of "best-in-class" execution.

McDonald's has exceeded expectations in recent years, in large part by emphasizing value and continually evolving its menu to keep up with changing tastes. Some of its most successful new offerings in recent years – such as snack wraps and specialty coffees – give customers a way to treat themselves for just a few bucks. They also happen to have high profit margins.

Kalinowski said he thinks that McDonald's will continue to grab market share. He maintained his "buy" rating on the stock.

Still, other analysts have noted that McDonald's growth has slowed in recent times, which could reflect stiffer competition from newer chains like Panera Bread Co., which offers higher-end food in a fast casual atmosphere. Long-time rivals such as Wendy's Inc. and Burger King Worldwide Inc. are also reworking their menus, renovating restaurants and launching new ad campaigns to win back customers.

In the U.S., McDonald's said sales rose 3.6 percent in the quarter, with increased traffic contributing to growth.

In Europe, where McDonald's does 40 percent of its business, the company said customer traffic was down in several economically hard-hit regions. But the company said that it's faring better than its competitors and, overall, sales rose 3.8 percent.

In the region that includes Asia Pacific, the Middle East and Africa – where McDonald's is looking to expand its presence – the figure edged up just 0.9 percent. Results from Australia and China offset weakness in Japan, where consumers are still reeling from last year's earthquake and tsunami and eating at home more often.

For the quarter, McDonald's says it earned $1.35 billion, or $1.32 per share. That's down from $1.4 billion, or $1.35 per share, in the year-ago period. McDonald's said unfavorable currency exchange rates hit its results by 7 cents per share.

In the third quarter, the company expects exchange rates to hurt results by 8 cents to 10 cents per share.

Total revenue for the quarter was $6.92 billion, up slightly from $6.91 billion a year ago. When stripping out the impact of exchange rates, the company said revenue rose 5 percent.

Analysts polled by FactSet on average expected $1.38 per share on revenue of $6.94 billion.

Shares of McDonald's, which has 33,000 locations around the world, were down $2.69, or almost 3 percent, at $88.89.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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