McDonald’s Earnings Making Lemonade Out of Lemons?
Tomorrow the global first name in fast food, McDonald’s Corp. (NYSE:MCD) is expected to report its 8th consecutive quarter of profits, with new products such as its Frozen Strawberry Lemonade helping to offset rising costs on its staple hamburgers, fries, and chicken nuggets. Analysts’ average estimates are calling for an EPS of $1.28 on revenues of $6.65 billion for Mickey D’s. Experts believe the company is trying to follow the lead of other successful food chains, such as Starbucks (NASDAQ:SBUX), who make major returns on sales of high margin beverages. McDonald’s recently began offering its McCafe specialty drinks, which include lemonades, smoothies, and more, and they’ve been a hit with customers so far according to Bloomberg.
“No one has been able to do it until McDonald’s,” said analyst Steve West, who’s based in St. Louis and recommends buying the shares. “They promote the frozen beverages for warmer months and they’ll go back to the McCafe during the winter months.” Insiders say rising commodities costs are forcing fast-food companies to look towards higher margin product sales to offset dwindling margins on top selling food items. MCD expects commodities prices to rise 4.5% this year, as CEO James Skinner commented, “We’ll have to take some price increases along the way, but it won’t equal the total inflationary increase of the commodity cost.” Competitors such as Yum! Brands (NYSE:YUM) have also forecast rises of up to 7% in their commodities costs this year.
Perhaps the company’s chief concern towards rising production costs is higher beef prices, which has been the ugly reality for McDonald’s (NYSE:MCD), the largest beef user in the United States, in 2011. “U.S. ground beef prices jumped to $2.77 a pound in June, a 16 percent increase from a year earlier, according to the Bureau of Labor Statistics.” If these trends continue, McDonald’s may be soon known just as much for its line of drinks as it is for the Big Mac as the company continues to look to higher margin product sales to sustain profitable growth.