McDonald's Posts Strong Earnings, Beats Expectations

LOS ANGELES – McDonald's Corp. (MCD), the world's largest restaurant company, on Tuesday reported a 53 percent rise in quarterly earnings as sales grew in the United States and results in Europe rebounded.

The fast-food company, which has been working to turn around its European business, said results were strong in France and Russia and improved in Germany.

McDonald's revitalized sales at its flagship U.S. business in the last three years by turning its focus from rapid expansion to improving existing restaurants with new menu items like salads and chicken strips and extended hours.

Progress had been slower at the company's European unit, although it posted a 2.8 percent rise in sales at restaurants open at least 13 months during the quarter.

McDonald's again appears to be making growth a priority as it said it plans to open 800 restaurants this year. The company said it would spend $1.8 billion of capital on both the openings and restaurant remodelings.

McDonald's did not say where the new restaurants would be, but one analyst said he expects it to step up growth in emerging markets like China and Russia.

"It makes sense to be spending money there," said Dave Kolpak of Victory Capital Management, which owns 4.2 million of McDonald's shares.

Fourth-quarter net income rose 52.9 percent to $608.5 million, or 48 cents per share, from $397.9 million, or 31 cents per share, a year earlier.

The results were in line with a preliminary report the company gave last week and included reductions of 3 cents a share from asset impairment and the strengthening dollar.

Revenue rose 4 percent to $5.23 billion, while worldwide same-store sales rose 4.2 percent. In the United States, same-store sales were up 4.1 percent.

For the year, McDonald's reported record sales of $20.5 billion.

"McDonald's crossed the $20 billion mark for the first time in global sales and also did it while translating 12.7 percent of that into net income, which is very admirable for a restaurant company," Morningstar Inc. analyst Carl Sibilski said.

In recent months, investors' concerns about McDonald's ability to maintain sales momentum in the United States have subsided somewhat as the company benefited from more 24-hour stores and rolled out gift cards and a new line of chicken sandwiches.

Kolpak also said he was encouraged to see that restaurant-level profit margins were flat after declining for the three previous quarters.

"With utility costs way up, construction costs up and with continued poor results in the UK ... it's encouraging that they were able to hold global store margins flat," he said.

McDonald's said it expected to buy back about $1 billion of its shares in the first quarter under a previously announced plan to spend $5 billion to $6 billion on repurchases and dividends in 2006 and 2007.

Despite its robust performance, Oak Brook, Illinois-based McDonald's is under pressure from activist hedge fund Pershing Square Capital Management to spin off its company-owned restaurants and sell 1,000 outlets to franchisees to increase shareholder value.

The company last week rejected Pershing's proposal, the fund's second in the last two months, and said it would offer details on its own plan to boost performance at company-owned restaurants during its quarterly conference call.

Sibilski, who said he's "not a big fan of splitting up the company," said he expected McDonald's management to play down Pershing's plan during the conference call, which began at 10:30 a.m. CST.

McDonald's shares were up 27 cents, or nearly 1 percent, at $35.98 in midday New York Stock Exchange trade.

The stock trades at about 16.6 times analysts' average 2007 earnings estimate, above the average multiple of 14.6 for companies in the Dow Jones Industrial Average, of which McDonald's is a component.