Commodity Costs, Consumer Advocacy Backlash No Match for McDonald's

Posts Profit of 15% and Global Sales of 5.6% as Analysts Expect Fast Feeder to Continue Gain Market Share

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Despite rising commodity costs, anti-obesity trends and challenges from consumer advocacy groups about the hamburger giant's practices on marketing to children, McDonald's posted second-quarter results that surpassed analysts' expectations, thanks in part to a strong marketing push.

Global same-store sales were 5.6% and net income up 15%, to $1.4 billion. Total revenue for the company was $6.9 billion, up 16% from the same quarter in 2010. Same-store sales were up 4.5% in the U.S., 5.9% in Europe and 5.2% in Asia-Pacific, Middle East and Africa. The company posted earnings of $1.35 per share. The average estimate of 22 analysts surveyed by Bloomberg was $1.28 a share.

McDonald's June same-store sales rose 7.7% globally, the largest monthly increase since November 2008. In the U.S., same-store sales climbed 6.9% in June, the biggest gain since February 2008, according to Bloomberg.

"Our performance has been driven by a combination of everyday value, the introduction of compelling new menu items, a sustained focus on core favorites and an ongoing emphasis on improving restaurant operations," said President-Chief Operating Officer Don Thompson during today's earnings call.

Janney analyst Mark Kalinowski noted "impressive same-store sales trends in the U.S., which we believe are attributable to best-in-class store-level execution," in a report issued today. "We believe that McDonald's will continue to grab additional market share in all three major geographies." Indeed, in 2010, McDonald's managed to eke out an additional share point in the U.S., up to 48% of sales in the hamburger category, according to Technomic.

McDonald's also reiterated anticipated commodity costs for this year rising by 4% to 4.5% in both the U.S. and Europe.

One of the bright spots for McDonald's has been its McCafe line of beverages, which it began rolling out nationally in May 2009. New McCafe beverages like the frozen strawberry lemonade helped the McCafe brand's sales rise "29% over second-quarter 2010 on top of the gains realized last year and we're still featuring dollar soft drinks and sweet tea in the majority of our restaurants" said Mr. Thompson.

At a time when fast feeders are still marketing heavily discounted items -- though increasingly less so -- McDonald's in the U.S. has been promoting its flagship products such as the Big Mac and Chicken McNuggets. Mr. Thompson said that advertising the Big Mac in and the Quarter Pounder "drove sales up double-digit," and the promotion of the "sharable" 20-piece McNuggets and new dipping sauces also "delivered positive results."

The fast feeder's hefty marketing push is clearly paying off. In the U.S., McDonald's outspends other restaurants by more than double, according to Ad Age 's DataCenter. Last year the chain spent $888 million on domestic measured media. Subway, the No. 2 spender in the restaurant category, spent $429 million.

In the first quarter of 2011 alone, McDonald's upped is U.S. measured media spending by nearly 12% over the first quarter 2010, according to Kantar. In the first five months of the year, it had upped its spending by 14.5% to $410.6 million vs. the same period in the prior year. On McCafe beverages alone, spending went up a 56% from January through May, the most available complete data.

McDonald's is not without its challenges, though. Critics are vocal about pushing the company to eliminate its marketing to children through its Happy Meal offering and Ronald McDonald icon. It has even been slapped with lawsuits. And while McDonald's stands by its products, it has significantly dropped its traditional measured-media spending on Happy Meal items lately. In the first quarter, McDonald's dropped its Happy Meal marketing by nearly 46%, according to Kantar.

The National restaurant Association, in conjunction with Healthy Dining, recently launched voluntary initiative by the restaurant industry to spur chains to offer and promote healthier kids-meal options. Chains such as Burger King and Chili's jumped on board, but McDonald's has not yet made a similar move.

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