McDonald's profit up – but costs rise

McDonald's reported a higher-than-expected quarterly profit as the world's largest restaurant company posted March sales that topped analyst expectations.

But the company's profit margin took a hit because of rising food and paper costs, and it increased its inflation forecasts.

It said it now expects food costs to rise between 4 and 4.5 per cent in the United States and Europe this year. In January, McDonald's said it expected its food costs to rise two per cent to 2.5 per cent this year in the United States and 3.5 percent to 4.5 per cent in Europe.

Its shares slid 1.5 per cent to $77.25 in premarket trading.

McDonald's has been on a great run – outperforming most other US restaurant chains and taking market share from smaller rivals amid a slow US economic recovery.

After struggling during the recession, McDonald's has outperformed its fast food peers by innovating its menu. The company pointed to its McCafe menu as a source of the sales gains.

"The bottom line is they're still doing a great job of growing revenue," said Peter Jankovskis, co-chief investment officer at Oakbrook Investments in Lisle, Illinois. The firm owns McDonald's shares.

Analysts remain concerned about high gas prices which could prompt fast-food restaurant patrons to cut back. But Jankovskis said McDonald's was better equipped than others.

"The big test will come in the summer months with gasoline remaining in the neighborhood of $4- that's when the strength of McDonald's will come through."