McDonald's Corp. said Thursday that it expects more price increases for beef and other key ingredients, sending its shares down even as it reported its first-quarter profit and revenue rose.
The company spent the day emphasizing how sales have increased, beating analysts' expectations, and showcasing strong demand in Europe and Asia.
But analysts were more concerned about rising food prices, a global trend that is rippling to customers, franchisees and investors everywhere.
The company said it's likely to raise menu prices this year, but that could scare off the customers who dine there mainly because of the low cost. It already raised prices 1 percent in early March.
Some franchisees are upset that McDonald's is spending money remodeling stores while they're being squeezed by the cost of food. Separately, the company faces rising interest expenses and an overall higher tax rate.
Its stock fell $1.49, 1.9 percent, to close at $76.91.
"Yes, we've got some headwinds," CEO Jim Skinner said in a call with analysts. "But in another six months we may have some tailwinds."
As the world's biggest hamburger chain, McDonald's can influence the rest of the fast-food industry with its decisions about how to deal with the rising prices.
The company said it expects an increase of 4 percent to 4.5 percent in food prices in U.S. and Europe for the year. In January, McDonald's predicted an increase of 2 percent to 2.5 percent for U.S. food prices.
Mitch Speiser of Buckingham Research noted the difference and asked executives what they'd missed.
"It's nothing that was missed in the outlook in January," Chief Financial Officer Pete Bensen replied, noting that other companies also raised their predictions. "It's actually the events that have happened since then that have dramatically (affected) all the markets," including floods in Australia and unrest in North Africa.
McDonald's size and relationships with suppliers will help it navigate price increases, Bensen said.
Skinner said the company does not pass along all cost increases to customers. "They get pinched everywhere," he said. "They should not suffer the same fate at McDonald's."
Rising gas prices and grocery bills and lingering high unemployment are hammering many customers, though it's not clear how that will affect McDonald's. The chain will benefit if higher-income people trade down again to eat fast food, but the company could lose lower-income customers who decide to forgo eating out at all.
Rising costs are also putting a strain on franchisees, who run nearly 90 percent of U.S. stores. The corporate parent is starting to hear whispers of dissent.
Some franchisees complain that the company is spending money to remodel stores while food prices are rising, analysts say. Other franchisees say they aren't making enough profit from selling Dollar Menu items and want to charge more.
Competitor Burger King faced a similar uprising when it asked franchisees to sell a $1 double cheeseburger. The company this week settled a lawsuit brought by the franchisees in 2009.
Skinner said McDonald's works with franchise leaders to craft strategies, but that the company has to take a long-term view. He said the franchisees "typically follow our lead."
"Now that doesn't mean that you don't have people out there that are stressing and concerned, just like we are as a company," Skinner said.
The push to remodel stores, Skinner said, is about crafting a better image, and it doesn't give the company the right to charge higher prices.
"We used to think that because we had a modernized restaurant, because we had ferns and grass, that we could take an extra nickel on the big sandwiches," he said, referring to previous remodeling campaigns. "And that was a mistake."
Outside of food prices, McDonald's also faces increasing expenses on interest and taxes. It said it expects interest expenses to increase 5 to 6 percent. It predicts its effective tax rate will be 30 to 32 percent, up from 29.3 percent last year. It didn't give details on either prediction.
In the first quarter, sales were strongest in Europe, McDonald's largest market, and Asia, though they continued to increase in the U.S. Europe accounts for 40 percent of McDonald's revenue, compared with 32 percent from the U.S.
Net income rose 11 percent to $1.2 billion, or $1.15 a share, beating analysts' estimates of $1.14. Revenue increased 9 percent to $6.1 billion, topping analyst expectations of $6 billion.