Weak Dollar Boosts McDonald's 3Q Profits

CHICAGO — Strong breakfast sales in the U.S. and a weak dollar overseas proved a potent combination for McDonald's Corp. in the third quarter, helping to power the fast-food chain to a 27 percent jump in profit despite rising costs.

The Oak Brook, Ill.-based company reported earnings Friday that were in keeping with preliminary results released last week, posting an impressive $1.07 billion in net income. McDonald's executives said they hope to keep the momentum going with more new products, hinting that specialty coffees such as cappuccinos, lattes and mochas may be coming soon on the heels of its success with premium roast coffee.

"Our business is strong around the world," President and Chief Operating Officer Ralph Alvarez said on a conference call. "We are pleased with our performance for the third quarter and believe we're on track to achieve a record year, both for our system and our shareholders."

The big question is how long McDonald's can keep up its hot streak in the face of soaring dairy and other commodity costs, higher labor expenses and prospects that the dollar will strengthen.

Carl Sibilski, managing director of Chicago-based Oyster Capital Management, said McDonald's is doing a good job selling products that people want. But he said its surge may be exaggerated by all the help it's getting from the weak dollar.

"Foreign currency benefits are making McDonald's results seem better than they probably should," he said. "It's not nearly as rapid growth as it appears in dollar terms."

The weak dollar gives a big boost to McDonald's, which gets about two-thirds of its sales from outside the United States, when sales in strong overseas currencies are translated back into dollars. The company got more than half its 7 percent increase in sales for the quarter from currency translation.

Sibilski noted that the dollar could strengthen if the economy goes into recession, and labor costs will rise if there is no recession.

U.S. profit margins already are softening, the company acknowledged, weighed down in part by higher costs of commodities such as cheese that it uses in its products. Chief Financial Officer Matt Paull said U.S. dairy costs, including cheese, were up 20 percent to 30 percent in the quarter while chicken was up 3 percent.

Overall, though, the company's financial performance is still clicking smoothly and sales are strong from Asia to the Americas and in between.

"With the U.S. still delivering solid sales growth and Europe's turnaround story powering recent results, McDonald's is on a roll," Morgan Stanley analyst Mark Wiltamuth said in a research note.

Net income for the July-through-September period amounted to 89 cents per share, up from $843.3 million, or 68 cents per share, in the third quarter of 2006. Aside from an after-tax gain of 6 cents per share from the sale of its Boston Market franchise, earnings were 83 cents, matching the expectations of analysts surveyed by Thomson Financial based on McDonald's early numbers on Oct. 12.

Revenue was $5.9 billion, up from $5.5 billion a year ago. Same-store sales, which the company announced previously, rose for a seventh straight quarter. The 6.9 percent gain was led by an 11.4 percent increase in its Asia/Pacific, Middle East and Africa division, the highest in 10 years.

McDonald's shares dropped 37 cents to close at $56.35 Friday, just off last week's all-time high of $57.53.

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