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McDonald's Profit Falls 8% on Strong Dollar

AP
Thursday, 23 Jul 2009 | 10:14 AM ET

McDonald's said Thursday the stronger dollar and a gain that boosted results a year ago led its second-quarter profit to dip 8 percent.

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The company also said its new espresso-based McCafe drinks had added to sales and help boost market share in the U.S. The drinks are being rolled out to all 14,000 of the company's U.S. locations — a move the company began heavily promoting in ads nationwide during the quarter.

The earnings dip was expected because the company had predicted a hit to profit from exchange rates earlier this year.

Most U.S. companies that sell goods internationally convert those sales from foreign currencies into dollars when they report their financial results. If the dollar is stronger than those currencies, the translation results in fewer dollars in revenue.

Excluding that and the gain a year ago, operating income rose and sales at established locations continued to grow despite as consumers continued to turn to fast food to save cash.

Still, McDonald's shares fell $1.99, or 3.3 percent, to $56.83 in morning trading.

The Oak Brook, Ill.-based fast-food chain said net income fell to $1.09 billion, or 98 cents per share, from $1.19 billion, or $1.04 per share in last year's quarter.

Excluding a 10-cent-per-share gain a year ago from the sale of McDonald's minority interest in Pret A Manger, the company earned 94 cents per share in the 2008 quarter.

Analysts polled by Thomson Reuters expected profit of 97 cents per share. Analysts typically exclude special items.

Same-store sales, or sales at locations open at least a year, rose 4.8 percent globally and 3.5 percent in the U.S.

The company did not detail its June same-store sales in its earnings release, but Deutsche Bank analyst Jason West said in a note to investors that it appeared same-store sales rose just 2.6 percent worldwide, below the 4.5 percent rise he was expecting.

Analysts have been waiting to see whether U.S. customer would be enticed to stray from their favorite specialty coffee destinations to try the McCafe drinks. The company has not offered any specific sales data for the new line, but has said it has contributed to sales in recent quarter.

Starbucks — arguably one of the fast-food chain's biggest competitors in the coffee arena — reported a same-store sales dip of 6 percent in the U.S. in its fiscal third quarter earlier this week. That slide, though, was less steep than in the prior quarter when same-store sales dropped 8 percent.

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On a conference call with investors, Starbucks CEO Howard Schultz said rather than hurting sales at the gourmet coffee chain, heavy advertising and the launch of more speciality drinks at lower-cost competitors like McDonald's has brought more people into the category.

Overall revenue fell 7 percent to $5.65 billion because of the effect of translating foreign currency into dollars.

The company said earlier this year it expected both second and third quarter profit to take an 11-cent-per-share hit from exchange rates.

Analysts predicted revenue of $5.72 billion.

Although the company did not offer any guidance for the next quarter or the full year, CEO Jim Skinner said in a statment that same-store sales so far in July are similar to or better than same-store sales in June.

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