McDonald's third-quarter income rises 9%

10/22/2011 12:00 AM

10/22/2011 12:09 AM

NEW YORK — McDonald's Corp.' s third-quarter net income rose by 9 percent as it kept defying a tough economy and attracting more customers.

But those diners might want to get ready to pay more.

The world's largest hamburger chain, which has performed well throughout the recession and its aftermath, noted potential challenges like the rising cost of beef and higher labor costs. McDonald's, a bellwether for the rest of the fast-food industry, hinted that it could raise menu prices for the third time this year.

Companies of all stripes, from restaurants to clothing makers, raised prices this year as the cost for many raw materials spiked, and it appears that more increases are coming. For McDonald's that means the beef in its burgers, the grain in its buns and the coffee in its lattes.

But companies know that they still have to be careful to not raise prices too much and drive away customers, who are choosing carefully where to spend their money.

"The economists say we are officially out of the recession, but it hardly feels that way," CEO Jim Skinner said in a conference call with analysts. He referred to McDonald's gains as "hard-won" victories.

The 9 percent rise in net income, to $1.51 billion, represents McDonald's ninth straight quarter of earnings gains. Earnings per share of $1.45 beat analysts' expectations of $1.43. A 14 percent increase in revenue, to $7.17 billion, also beat the $7.02 billion predicted by analysts polled by FactSet.

McDonald's success has hinged on quickly adapting to customers' changing tastes and reshaping itself as a hip, healthier place to eat. It has added menu items like smoothies and oatmeal, remodeled restaurants, and converted more locations to 24-hour operations. All those moves, the company says, have brought in more customers.

The company didn't give details about possible price increases, though Skinner said that keeping prices affordable was "paramount."

"We will continue to evaluate additional price increases in light of this inflationary environment, always balancing our goal of driving traffic and market share gains with managing impact of rising costs," said Chief Financial Officer Peter Bensen.

The company's U.S. commodity costs spiked 8 percent this quarter compared to a year ago. That's higher than the 6 percent in the second quarter and the 1 percent increase in the first quarter.

The cost of beef, which normally declines at the end of the summer grilling season, stayed high, which McDonald's hadn't expected. The U.S. Department of Agriculture now predicts that consumers will end up paying 8 or 9 percent more for beef and veal in 2011 compared with 2010.

McDonald's has already raised prices to offset the higher ingredient costs, raising menu prices by an average of 1 percent in March and another 1.4 percent in May. Bensen said the company had experienced good "flow through" on the two price increases, meaning they hadn't driven away customers.

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