McDonald's Corporation (MCD – Free McDonald's Stock Report), the fast-food giant, reported strong first-quarter results this morning. Earnings were $1.15 a share, a nickel above our $1.10 estimate and 12% higher than the year-earlier figure of $1.03. Results were driven by a number of factors, including a 4.2% increase in global comparable-store sales, overall revenue growth of 9% (to $6,111.6 million), a strong franchise margin performance, and favorable foreign currency translation (this last item had a positive impact of $0.03 a share). On the downside, the operating margin declined due to rising costs for food and paper.

At 5.7%, Europe delivered the best comparable-store sales during the period. The United Kingdom, France, Russia, and Germany drove results across the pond, as remodeled restaurants, classic menu items, and the restaurant’s affordability drew customers. The geographic segment comprised of Asia/Pacific, the Middle East, and Africa saw comps increase 3.2%. Back home, comps grew 2.9% as guest traffic was driven by beverages and McCafe, the new Fruit & Maple Oatmeal, and featured menu items like the 20-piece Chicken McNuggets.

Looking forward, we think that the company will continue to post solid results through the remainder of 2011, as its mix of value, convenience, and menu should keep luring diners back to the Golden Arches. Indeed, management indicated that second-quarter comps are trending at least as well as first-quarter numbers (though we note that it is still early).

However, commodity-cost inflation is a concern. The company raised its guidance for cost inflation in both the United States and Europe to a range of 4.0%-4.5% from previous guidance of 2.0%-2.5% in the U.S. and 3.5%-4.5% in Europe. Nonetheless, we believe that McDonald's has the pricing power to offset some of the increases. Too, positive comps should result in some fixed-cost leverage, and we look for SG&A as a percentage of sales to decline this year. All told, we added a nickel to our 2011 bottom-line estimate, which now stands at $5.05 a share.

The stock sold off slightly on the report, possibly due to investor concerns about rising commodity costs and margin pressure.

About The Company: McDonald's is a quick service restaurant with over 32,700 locations in more than 115 countries. The majority the restaurants (about 80%) are operated by franchisees. The company is best known for its hamburgers and French fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks.


At the time of this article’s writing, the author did not have positions in any of the companies mentioned.