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Rising costs overshadow McDonald’s earnings; price hikes on horizon

Coming soon to McDonald’s: frozen strawberry lemonade, a new smoothie and higher prices.

In reporting that its first-quarter profit rose 11 percent, the Oak Brook-based hamburger chain revealed it expects to further raise prices this year, on top of a 1 percent March increase, the first such boost since late 2009.

Although the timing and amount of the increases were not specified, McDonald’s Corp. Chief Financial Officer Pete Bensen said the chain will make a conscious effort to lag competitors’ price increases — and with an eye on price hikes at the grocery store.

Bensen also said he expects expenses related to the company’s most-purchased items, including bread, cheese and beef, to increase 4 to 4.5 percent, about double what it expected in its January outlook.

Morningstar analyst R.J. Hottovy said that while McDonald’s “will see some margin pressure” in the months ahead, it’s probably the best-positioned operator in the category to offset that pressure because of its leverage with suppliers and its marketing savvy.

“So I think they will be successful in the price increases they have planned,” Hottovy said, adding that the increases are likely to be seen at the “premium end of the menu.”

Next month, McDonald’s will launch frozen strawberry lemonade, and it’s also planning a pineapple mango smoothie, McDonald’s President Don Thomson said. He added that the chicken lineup is being revamped and the Asian salad is being brought back.

McDonald’s first-quarter earnings were $1.21 billion, or $1.15 a share. Revenue increased 9 percent, to $6.11 billion.

McDonald’s shares fell $1.49, or 1.9 percent, to $76.91.

During the first quarter, same-store sales grew 4.2 percent globally, including 2.9 percent in the U.S.

In a research note, Janney Capital Markets analyst Mark Kalinowski attributed the same-store sales gains to “best-in-class store-level execution.” He added: “McDonald’s will continue to grab additional market share in all three major geographies, helping the stock gradually over time.”

In a report earlier this week, Kalinowski, citing Technomic data, noted that McDonald’s holds 49.5 percent of the hamburger category. He expects the chain to take a majority share as early as this year.


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