McDonald’s Predicts Further Food Cost Increases After Profit Rises 11%

McDonald’s Corp. (MCD) said first-quarter profit rose 11 percent, fueled by U.S. demand for coffee and burgers, and predicted further increases in food costs this year.

Net income advanced to $1.21 billion, or $1.15 a share, the world’s biggest restaurant chain said today in a statement. Analysts on average projected $1.14, according to a Bloomberg survey. Items such as beverages and the Chipotle BBQ Bacon Angus burger helped lure people in the U.S., the Oak Brook, Illinois- based company said.

McDonald’s and other restaurant chains are weighing price increases as surging expenses for commodities such as beef, pork and eggs cut into profitability. Chief Financial Officer Peter Bensen reiterated today that the company will probably raise prices to help counter the surge in ingredient costs.

“Food costs pressures are out there,” said Jack Russo, an analyst at Edward Jones & Co. in St. Louis who recommends holding the shares. “They may run into a few challenges this year, it will be interesting to hear them talk about raising prices because we know that McDonald’s is seen as a value brand.”

McDonald’s expects food expenses to rise as much as 4.5 percent in the U.S. and Europe, according to a filing today. In February, the company forecast an increase of as much as 2.5 percent in the U.S.

McDonald’s fell $1.49, or 1.9 percent, to $76.91 at 4 p.m. in New York Stock Exchange composite trading, the biggest decline in more than a month. The shares have gained 0.2 percent this year.

Beef Prices

Beef prices may rise as much as 5.5 percent and pork may jump 7 percent in 2011, according to U.S. Department of Agriculture data. The fast-food chain is the biggest beef user of all restaurants in the U.S., according to Kevin Good, a senior analyst at CattleFax in Centennial, Colorado.

To keep customers coming in, Chief Executive Officer Jim Skinner has debuted items like oatmeal and a line of McCafe frozen drinks, broadening the appeal of McDonald’s menu beyond burgers.

Chipotle Mexican Grill Inc. (CMG), the burrito chain spun off from McDonald’s in 2006, reported yesterday that restaurant operating profit margin shrank 0.9 percent to 25.2 percent in the first quarter on higher ingredient costs. The chain has raised menu prices in certain regions of the U.S. to help counter food inflation.

Japan Sales

McDonald’s sales at stores open at least 13 months climbed 4.2 percent globally last quarter. They rose 2.9 percent in the U.S., 5.7 percent in Europe, and advanced 3.2 percent in Asia, the Middle East and Africa. Comparable-store sales are an indicator of growth because they exclude the impact of store openings and closings.

McDonald’s Holding Co. Japan Ltd. said this month that March comparable sales fell 7.3 percent because of restaurant closures following the March 11 earthquake. Of the 3,300 stores in Japan, more than 50 remain closed as of April 14, according to Heidi Barker, a company spokeswoman. McDonald’s has also increased its exports of produce, sauces and oil to Japan to keep restaurants there stocked.

In the first quarter, McDonald’s sales increased 8.9 percent to $6.11 billion, compared with the average analyst estimate of $6.01 billion. In the year-earlier period, profit was $1.09 billion, or $1 a share.

To contact the reporter on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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