McDonald's eats away at competition

McDonald's third-quarter results showed it is growing faster than rivals but it may not outrun a weak economy for long.

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LOS ANGELES // McDonald's third-quarter results showed it is growing faster than rivals as US consumers visit fewer restaurants, but it may not outrun a weak economy for long. The world's largest hamburger chain on Wednesday posted an 11 per cent rise in quarterly profit that beat Wall Street estimates, helped by a seven per cent jump in global sales.

The chief executive Jim Skinner said the fast-food group "continues to be recession resistant" and that he was optimistic about the company's performance going into the last quarter of the year. But analysts question how long even low-priced fare will keep attracting consumers hit by rising fears of a global recession, a protracted credit crisis and job losses. "They're accurate when they say they're recession-resistant... but they can only dodge those bullets for so long. It's just a matter of time before the music slows a bit for them too," said RBC Capital Markets analyst Larry Miller.

He said McDonald's probably was grabbing market share from weaker competitors such as Wendy's/Arby's, independent operators and hard-hit, middle-tier restaurants. As consumers tighten their budgets, they are eating at home more often, or choosing lower-priced restaurants when they do go out. McDonald's net income rose to US$1.19 billion (Dh4.37bn), or $1.05 per share, from $1.07bn, or 89 cents per share, a year earlier. Analysts on average were expecting 98 cents per share, according to Reuters.

McDonald's shares are down about six per cent this year in what analysts describe as the worst restaurant operating environment in 20 years. The shares closed down 95 cents, or 1.7 per cent, to $54.18 on Wednesday. "No company is going to outrun a recession. Maybe we're seeing a little gravitational pull downwards on McDonald's, but relative to their peers they're doing phenomenally well," said Matthew Kaufler, portfolio manager at Touchstone Value Opportunities.

McDonald's has captured consumers trading down from more expensive restaurants with food such as salads and its new southern-style chicken sandwiches, Mr Miller said. At the same time, its Dollar Menu and low-priced drinks helped it to retain customers. Without that two-part strategy, Mr Miller said, "this would be a very different story". Still, he noted that worldwide September same-restaurant sales were up 4.5 per cent, below analysts' expectations of a rise of five per cent and his forecast for a 5.5 per cent increase, as US and European sales missed his targets for the month.

Although the company did not offer specific guidance for the fourth quarter, Mr Skinner said he was "optimistic" about its outlook and that October sales had been strong. * Reuters / Associated Press