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McDonald's Profit Surges 22% On Strong Sales in Europe, U.S.

McDonald's famous french fries.
Charles Rex Arbogast
McDonald's famous french fries.

McDonald's said its first-quarter earnings climbed 22%, boosted by surging sales in Europe and strong demand for its new U.S. menu items.

The fast-food leader also said it is franchising nearly 1,600 restaurants in Latin America and the Caribbean in a deal that will net it $700 million -- part of its continued paring down of company-owned restaurants worldwide.

Profit for the first three months of the year was $762 million, or 62 cents per share, matching its April 13 estimate. That was up from $625 million, or 49 cents per share, in the same period a year ago.

The earnings were in keeping with a preliminary announcement by the company last week.

The Oak Brook-based company said revenue rose 1% to $5.46 billion from $4.91 billion. The consensus estimate of analysts surveyed by Thomson Financial was for revenue of $5.42 billion.

The company said its Latin American and Caribbean restaurants will now be franchised by a Latin American company called Woods Station, in a transaction being carried out in combination with a 20-year licensing program.

Under its development licensee program, ownership of company restaurants is effectively handed to local entrepreneurs who provide the capital and the land. Woods Station has been a McDonald's franchisee for more than 20 years.

It said it will take a $1.6 billion impairment charge in the second quarter, reflecting the transaction and accumulated currency translation losses, in line with previous guidance.

CEO Jim Skinner said McDonald's will use the proceeds received to increase the amount it expects to return to shareholders to at least $5.7 billion in 2007 and 2008 through dividends and share repurchases.

"For our customers and the McDonald's system, this transaction enables us to grow faster and become even more locally relevant in a part of the world that has exhibited strong demand for our brand,' he said. 'For our shareholders, the strategic actions we're taking will reduce volatility and further solidify our commitment to generate strong returns and focus management's attention on the markets with the greatest impact on our results.'

McDonald's said it has recorded 48 straight months of higher sales from its established restaurants, its longest such streak since 1980.

McDonald's quarterly results were boosted by a particularly strong March, with same-store sales rising 8.2% worldwide and 11.2% in Europe, boosted by a discount-price or value menu in the United Kingdom and successful promotions in Germany and France.

The U.S. business, its largest market with about 13,800 restaurants, extended a four-year run of unusually strong results in the quarter with a string of new products including snack wraps, more salads and premium coffee, all introduced within the last year.

The stock's continuing rally has stopped the push by activist hedge fund manager William Ackman for a financial restructuring last year when it was trading in the mid-$30 range. Shares are currently just off the all-time high of $49.56 reached Nov. 12, 1999.

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