McDonald's boosts profits 13% to $141.7M in 1st Q

Nation's Restaurant News, May 8, 1989 by Rajan Chaudhry

McDonald's boosts profits 13% to $141.7M in 1st Q

OAK BROOK, Ill. -- McDonald's Corp., the nation's largest restaurant operator, overcame higher labor costs, rising interest expenses, and unfavorable foreign exchange rates to post a 13-percent gain in net income on a 12-percent year-to-year rise in revenue for its first quarter.

Boosted by asset sales and a lower tax rate, McDonald's profits increased to $141.7 million, while its revenues climbed to $1.38 billion for the quarter ended March 31, the company said.

Although McDonald's earnings were in line with most projections and its stock rose slightly -- about 88 cents to $54.38 per share--on the day following the announcement, several analysts said they were unimpressed by the company's performance.

"It was not a stunning quarter by any stretch," said analyst Caroline Levy of Shearson Lehman Hutton.

Customer counts at domestic stores fell 1.5 percent, Levy noted, a figure McDonald's would not confirm. And the strenght of the dollar against foreign currencies--primarily the yen--cost McDonald's $5 million, a figure McDonald's did acknowledge.

"For the first time [foreign] affiliate revenues were up very marginally," said Levy. "Previously we'd been seeing huge growth in that area."

McDonald's faced difficult comparisons in April and will face them again in May, Levy said.

"We have another couple of months of negative customer counts because the Scrabble promotion is not as successful as Monopoly was," Levy predicted. "And then in June or July, we're going to see counts turn positive because of easy comparisons, and also because they are rolling out their chicken sandwich more aggressively now."

McDonald's recently introduced a Country Style McChicken sandwich, priced at about $2.69, in New York. And it is testing the product in other markets, a McDonald's spokeswoman confirmed.

Although McDonald's would not elaborate on the scope of testing or its plans for rollout, Levy said the McChicken sandwich is now in about 3,300 stores, up from 1,500 only a few months ago.

In the first quarter, a 6-percent increase in number of stores in operation over the year-ago quarter, which brought the McDonald's system to 10,577 units, as well as menu-price hikes at franchises and affiliates, boosted systemwide sale 10 percent to $3.93 billion.

Company stores have not taken a price increase so far this year, said McDonald's spokesman Chuck Ebeling.

McDonald's booked $8.1 million in gains on the sales of restaurant, up 76 percent over proceeds from assets sales recorded in last year's first quarter. And tax benefits related to certain foreign operations trimmed McDonald's effective income tax rate to 37.6 percent from 38.8 percent a year ago.

On the downside, higher average debt levels resulting from expansion and reinvestment, the consolidation of McDonald's Spain and HongKong affiliates, and higher interest rates pushed interest expense up 27 percent, to $72.7 million, for the quarter.

And margins at company-operated restaurant shrank to 16 percent of sales in the first quarter of 1989 from 16.4 percent in the year-ago period, Ebeling said, as higher labor, occupancy, and other operating costs offset lower food costs as a percent of sales.

PHOTO : An upscale McDonald's unit in midtown Manhattan.