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McDonald’s sees profits; changing dollar menu

/ Source: The Associated Press

Consumers helped bring McDonald’s Corp. back to profitability in the second quarter by spending on breakfast biscuits, chicken sandwiches and drinks despite the tough economy in the U.S.

But the nation’s No. 1 hamburger chain also warned Wednesday that it expects beef and chicken costs to rise substantially in the U.S. and Europe through the rest of this year, and is testing several options that may change the makeup of its popular dollar menu.

“The way the dollar menu looks today won’t be the way it’s going to look next year,” said McDonald’s President and Chief Operating Officer Ralph Alvarez on a conference call with investors. “In this current environment, we’ve got to make sure we’re pricing smart, not just pricing low.”

McDonald’s earned $1.19 billion in the second quarter, including a gain from the sale of its stake in sandwich chain Pret A Manger, solidly besting Wall Street estimates. A year earlier, the company posted a loss of $711.7 million stemming from charges on the sale of its Latin America and Caribbean businesses.

The Oak Brook, Ill.-based company said revenue rose 4 percent to $6.08 billion, also beating analysts’ predictions.

McDonald’s specifically credited its breakfast items, new chicken offerings and beverages with the sales increases. The chain introduced a new chicken biscuit sandwich for breakfast, a chicken sandwich for lunch and espresso-based coffee drinks in some locations.

Alvarez said the coffee drinks are selling ahead of the company’s expectations so far.

McDonald’s also said it expects beef costs to rise between 8 percent and 9 percent in the U.S. and Europe and chicken costs to jump between 5 percent and 6 percent in the U.S. and between 7 percent and 8 percent in Europe.

“I’ve got to imagine that investors are a little bit spooked” by the projections, said RBC Capital Markets analyst Larry Miller. “It’s only getting tougher, even for these guys.”

Beef and chicken costs have climbed for virtually all restaurant companies due to soaring prices of corn and soybeans — key ingredients in animal feed.

McDonald’s shares fell $1.21 to $58.91 in afternoon trading.

Still, analysts seemed impressed by the company’s ability to grow its sales in a tough operating environment.

“They’ve actually held up very well,” said Miller, adding that McDonald’s may be benefiting from consumers looking for lower-priced options for dining out.

Investors and analysts had been eagerly awaiting the sales figures as a way to gauge whether the fast food chain can withstand the tough economy as consumers cut back on eating out. McDonald’s reported its first monthly decline in U.S. same-store sales in the first quarter, leading some to wonder whether even the Golden Arches was being hit by consumers’ reluctance to spend.

But in the second quarter, McDonald’s reported same-store sales increases every month. For June, the company said same-store sales rose 5.6 percent overall and jumped 3.8 percent in the U.S.

For the quarter, same-store sales, or sales at established locations, grew in every region, rising globally by 6.1 percent.

U.S. same-store sales rose 3.4 percent, up from 2.9 percent growth in the first quarter. In Europe — where consumer confidence is also waning — same-store sales jumped 7.4 percent. They rose 8.8 percent in the Asia/Pacific, Middle East and Africa division.