McDonalds Corporation

Analyst Maria Jose Abuawad

April 23, 2013

Pros:

Strong brand
Economies of scale
Cohesive franchisee system
International growth opportunities
High profit margins
Pays a dividend
Market share leader
Cons:
Figure 1 1 Year Performance MCD vs. S&P 500
Vulnerable to currency exchange
Highly competitive industry
Obesity propensity
Ticker MCD
Porters Five Forces:
Exchange NYSE
Industry Restaurants Threat of Competition: HIGH
Sector Consumer Staples Threat of New Entrants: LOW
Income and Capital Threat of Substitutes: HIGH
Classification
Appreciation Power of Suppliers: MODERATE
Market Cap. US $99.3 Billion Power of Buyers: MODERATE
52 Week Price range $83.31 - $99.78 Brief Overview
Recent Price $99.05
Current P/E 18.48 McDonalds is the leading global foodservice retailer
with more than 34,000 local restaurants serving
Projected 2015 P/E 17.5x nearly 69 million people in 119 countries. The
Projected 2015 EPS $7.24 company operates in the United States, Europe, the
Dividend Yield 3.10% Asia/Pacific, the Middle East, Africa, Canada, and
Latin America. The restaurants offer various food
Debt Rating A items, soft drinks, coffee, and other beverages, as well
Beta 0.34 as breakfast menus. McDonalds employs 1.8 million
people. It also franchises 80% of its restaurants. The
Recommendation: company was founded in 1940 and is based in Oak
Brook, Illinois.1

HOLD 1
Yahoo Finance
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 Portfolio Considerations

Equity Equity
Holding Equity YTD
Cost Period Holding Equity YTD Total PE Correlation
Per Current Total Return Period Total Appreciation Return Ratio Equity Dividend
Company Name Ticker Share Price (%) Return ($) Return (%) (%) TTM Percentage Yield

Altria Group Inc MO 34.17 33.61 0.9496296 $25,731.93 13.36% 20.96% 15.20 2.87% 5.24% 0.396924804
Diageo Plc.-Sponsored Adr DEO 70.7 123.249 1.198117 $20,837.89 40.98% 46.07% N/A 3.26% 1.83% 0.711924381
McDonalds Corp MCD 53.98 98.51 1.145804 $22,575.43 -1.81% 2.14% 18.38 3.87% 3.13% 0.577851496
Procter & Gamble Co/The PG 57.32 76.61 0.4638683 $12,230.91 14.84% 19.61% 19.34 3.79% 2.93% 0.53222093
Total 3597.6072 0.855463932 $625,247.97 36.54% #VALUE! 100.00%

The EIF purchased 365 shares of McDonalds (MCD) on March 6, 2009. Each share was
worth $53.98. Now, McDonalds shares are trading at $98.51. This yields a 115% total
return including dividends. McDonalds is the second best performer in the consumer
staples sector, after Diageo Adr with a total return of 120%. MCD stock also provides a
solid dividend yield and the fund is currently receiving a 3.16% annual return.

Currently, the consumer staples sector compromises a 16.23% of the EIF portfolio. The
target for this semester is 11.66%. This difference makes the fund overweight in the
consumer staples sector by 4.57. Although the sector is currently overweight, I dont see
any reason to sell MCD stock. The company is trading at its 52 week high, but dividends
received and the capital appreciation still makes this stock worth owning

Consumer Staples
Altria Group Inc 793 $24,931.92 4.88% $ 23,512.45 2.90% 2.03%
Diageo Plc-Sponsored Adr 246 $28,678.68 4.88% $ 21,505.32 2.66% 1.86%
Mcdonald's Corp 365 $19,702.70 4.88% $ 32,196.00 3.98% 2.78%
Procter & Gamble Co/The 460 $26,367.20 4.88% $ 36,073.68 4.46% 3.12%
Starbucks Corp 510 $26,229.49 4.88% $ 27,351.30 3.38% 2.36%
2,374 125,910 0 140,639 17.37% 12.15%

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-MCD stock is not strongly correlated with any of the stocks in our portfolio.

Purchase Rationale
The Educational Investment Fund decided to purchase a 3% position of McDonalds (MCD)
on the recommendation of Anna Kruhavets.

Main supporting arguments:

One of the most valuable brands in the world
Market leader in virtually every country it has a presence
Superior performance and positive long-term outlook
Well-covered dividends
Upside history
More defensive business model in the restaurant industry 2

Industry Overview

The fast food industry provides quick-service food products to consumers. Customers
usually pay before eating. The purchases are usually consumed on-site or taken out for
home consumption. These companies are involved in retail, transport, distribution, and
food services. The key economic drivers for the industry are global consumer spending,
consumer sentiment, and world price volatility of agriculture. The industries that supply
the food industry are the global agriculture, hunting, forestry and fishing industries. 3
According to the National Restaurant Association, the full-service restaurant segment is
projected to post its third consecutive year of real sales growth during 2013. Total sales are
expected to be $208 billion, up 2.9% from $202.2 billion last year. 4

2
Anna Kruhavets report 2009
3
Ibis World
4
National Restaurant Association
3
During the past 5 years, the global fast food industry has expanded despite changing
consumer tastes and the struggling economy. During recessions consumers cut down on
luxuries like eating out, but fast food restaurants like McDonalds were not greatly affected.
On the other hand, increasingly health conscious has hurt the demand for greasy foods
provided by these restaurants. Restaurants have responded by increasing the number of
healthy option on their menus.

Moreover, the growing demand from emerging economies boosted the industrys overall
performance. In many developed nations the industry is approaching saturation levels.
The reason for this is the oversupply of fast food businesses and extensive franchising. This
results in weaker revenue growth and intense price-based and product-based competition.

Over the next five years many fast food chains will start to introduce new healthy food
alternatives and expand their current product lines. This will include fresh items, organic
produce, and much less fried items. It is possible that these personalized changes will
involve less standardization but consumers are more willing to pay higher prices for
healthier foods. The personalization and the continued expansion into emerging markets
will result in revenue growth of 4.5% per year on average to $623.6 million up to 2017. 5

The two major players are McDonalds Corporation and Yum! Brands Inc. McDonalds held
20.9% of the market share in 2011. Yum! Brands held 11.9% of the market. The next
market share leader is Subway with an estimate market share of 3.5%.

Global fast food restaurants will benefit as the global economy improves and consumers
continue to spend again on luxuries like eating out. The primary expansion driver of
industry growth will be the expansion of US-based fast food chains. The global consumer

5
Ibis World
4
spending is expected to increase at an average annual rate of 3.5% and the demand for fast
foods will increase in line with this expansion.

Moreover, the competition is very likely to intensify in the next couple of years especially in
developed nations. This, in hand, will increase the price-based competition and the
emphasis on the regular introduction of new products. The oversupply of the fast food
business has weakened revenue growth, demand, pricing, and product competition. These
trends, along with health issues concern analysts. The high number of obese children can
also be attributed to fast food restaurants. Obese children and the aging population that
demand less fast food is also a concern. Major operators will look to expand their revenues
and profits by offering healthier and less costly alternatives to red meat items. These less
costly alternatives and healthier products will reduce industry margins.

Given these factors, some single-product operators, such as those of only hamburgers, will
face the greatest risks over the next 5 years. Therefore, it is expected that Asia and the
Middle East are regions where the US-based fast food brands have not saturated the
market yet and where these operators are booming. Newly industrialized nations such as

5
 India, Russia, and Brazil will also increase their consumption of fast food as their average
incomes continue to grow and people can afford to purchase Western fast food. These
Western food chains will have to incorporate more local traditional cuisines to prosper.

On the other hand, restaurants will continue to consolidate and underperforming stores
will close, particularly in developed markets. Profit margins are expected to weaken as the
industry continues to mature and prices remain steady or decline. This is where
McDonalds should be emulated. The company has increased its success by expanding their
menu to include high margin food items such as coffee and smoothies. These low-costs,
high-profit items offer a great way to increase revenues and increase bottom lines.

Revenue Outlook

Year Revenue $ billion Growth %

2013 526.2 5.3
2014 551.0 4.7
2015 574.3 4.2
2016 600.0 4.5
2017 623.6 3.9
2018 645.6 3.5

Figure 2 Ibis World Graph

The global fast food industry is in the growth phase of its industry life cycle. The industry
value added, which measures an industrys contribution to the overall economy, is
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forecasted to increase at an annualized rate of 2.9% until 2017. Even though it is less than
the expected global GDP growth, over the long term the industry is expected to outperform
the global economy.

Industry Performance

The key external drivers are global consumer spending, the consumer sentiment index, and
the world price volatility of agriculture. The growth of this particular industry is very
sensitive to changes in global consumer spending. During recession, unemployment causes
decreases in consumption levels. If personal consumption is high, consumers are more
likely to spend money on eating out. Since global consumer spending is expected to
increase, the industry is provided with an opportunity for growth.

Changes in consumer sentiment also greatly influence household expenditures on

discretionary items such as fast foods. If consumers are optimistic about the economy they
spend more on these particular items. East Asia is one of the largest sources of revenue
growth and expansion for the industry. The ability of the industry to prosper and gain
profits depends on the performance of the regions economy and the demand for fast foods.

Last but not least, the world price volatility of agriculture is also a strong indicator of the
prices that fast food restaurants can expect to pay for their supplies. If the price of the
ingredients goes up then the costs increase and profit margins shrink because the extra
costs are not passed on to consumers. This particular driver is expected to increase in the
following years as well.

The fast food industry has grown during the past 5 years. This has been the case even
though the economy has been hit hard and costumers have also been aware of the health
risks with a diet high in fat, salt, and sugars. Even with these factors, the industry has
experienced growth in emerging markets. As the economy plunged into recession
consumers were more selective of how they spend their disposable income. In 2009 global
consumer spending declined 0.9%. Luxuries such as eating out were the most affected.
Many consumers cut out fast foods from their diets, and others simply moved towards the
lower priced items in fast food restaurants. This forced companies to promote their
restaurants as the place to get the greatest value for their money.

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In developed nations the industry is approaching saturation levels because of the
oversupply of fast food businesses and extensive franchising. Because of this, the industry
is experiencing weaker revenue growth and demand, intense price-based and product-
based competition. Developed nations and regions make up a large percent of industry
revenue in 2012. Many operators in developed nations particularly expanded their menus
to ensure that they retain their customers.

On the other hand, operators have been pushing into emerging markets. These markets
include Asia, Russia, South America, and India. These countries are attractive because of
their large populations and rapid population growth. They also have a large share of
younger age groups that are the main consumers of fast foods. Likewise, these emerging
economies also have increasing incomes and a growing middle-class that desire Western
foods.

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 MAJOR MARKETS

Porters Five Forces

Threat of Competition High

The competition in the fast food industry is high and the trend is increasing. Operators
compete on the basis of price, location, food quality and consistency, style and
presentation, and food range. New products are constantly being introduced because
variety greatly affects consumer demand. Service is also expected to increase in quality.
Restaurants are constantly implementing strategies such as drive-thru.

The competition between franchises and locally operated fast food restaurants adds to the
competition. Even though the single-location fast foods account for a small share of
restaurants their share of industry revenue is larger. They have successfully established
their restaurants in high traffic locations and at the same time in marketing their brands.

Threat of New Entrants Low

The fast food industry is made up of large chains that already count with economies of
scale, distribution channels, and technological advances. On the other hand, low start-up
costs make it easy to compete in the industry. Although there are many competitors
entering the market, on the global scale the giants like McDonalds are still in advantage. It
9
is very unlikely that the new entrants will take any significant market shares. Fast food
giants like McDonalds count with brand loyalty that makes it hard for new entrants to pose
a threat.

Barriers to Entry6

Barriers to Entry checklist Level/Impact

Industry Competition High
Industry Concentration Low
Life Cycle Stage Growing
Capital Intensity Medium
Technology Change Medium
Regulation and Policy Heavy
Industry Assistance None

Threat of Substitutes High

Fast foods are discretionary items that are easily substituted by other types of meals . These
might include meals prepared at home, dine-in restaurants, deliveries, and meals supplied
at convenient stores. Since customers have become more aware of the health effects of fast
foods other substitutes are becoming more and more attractive. Vast amounts of money
have been spent on marketing and promoting healthier fast foods to be able to compete
with healthier options. Restaurants need to change the image customers have and at the
same time increase brand awareness.

Power of Suppliers Moderate

7Supplier relations are very important to this industry. The prices charged by suppliers are
the major factors that affect net income. Although the supplies are commodities and
suppliers do not have the ability to charge more than the market, operators do not have the
chance to bargain for cheaper products
or large quantity discounts. Good
relationships are crucial to this
particular industry so that large
quantities of supplies are available
when needed. Lastly, although there

6
Ibis World
7
IbisWorld
10
are many suppliers, location is extremely important. So suppliers closer to the operators
substantially influence transportation costs. The fact that suppliers do not have the ability
to increase prices but operators do not have the ability to bargain makes supplier power
moderate in the fast food industry.

Power of Buyers Moderate

Although customers do not have the power to influence price directly, they influence it
greatly. With the social media and health concerns customers can readily supply opinions
and influence others with these. All companies in the fast food industry must adhere to
social regulations; spend in enhancing their brand reputation, and promoting quality
standards so that customers feel safe and content when consuming their products.

Company Overview

HISTORY8

McDonalds began in 1940 when brothers

Maurice and Richard McDonald opened their
first restaurant in 1398 North E Street at West
14th Street in San Bernardino, California. Their
introduction of the Speedee Service System
in 1948 advanced the principle of our modern
fast-food restaurants. The original mascot of
McDonalds was a man with a chefs hat on top
of a burger shaped head. His name was
Speedee. In 1967 Speedee was replaced with
Ronald McDonald when the company decided to file a U.S. trademark. The company first
filed for a U.S. trademark on the name in 1961 with the description of Drive-In Restaurant
Services which continues to be renewed. The same year the company filed a logo
trademark on the double arched M symbol.

In 1954 Ray Kroc was surprised with a huge order of 8 multi-mixers from the restaurant in
California. When he decided to follow-up he found a small successful restaurant run by two
brothers called Dick and Maurice McDonald. He was shocked with the effectiveness of the

8
Wikipedia
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operation. The brothers owned a limited menu of burgers, fries, and beverages which
allowed them to concentrate on quality over quantity. Stunned as he was, he pitched to
them his vision of creating McDonalds Corporation. Five years later Ray bought the
exclusive rights to the name McDonalds. By 1958, McDonalds had sold is 100millionth
hamburger. Ray ran McDonalds with two philosophies in mind: In business for yourself,
but not by yourself and he also wanted his burgers, buns, fries, and beverages to taste the
same in Alaska as they did in Alabama. 9

His principle consisted of a 3-legged stool. One leg was McDonalds, the second were the
franchises, and the third were suppliers. Kroc also believed that the entrepreneurial spirit
should be rewarded so he rewarded his individual franchises when they were creative.
Many of McDonalds famous menu items were created by the franchises. Although
creativity was rewarded, Ray made sure that the founding principles of quality, service,
cleanliness, and value were still core to each individual business. In 1961 Ray launched a
training program called Hamburger University. Here
franchisees and operators were trained in the scientific
methods of running a successful McDonalds. The
university also had a laboratory where students could
develop, cook, and serve to create new methods. With all
its expansion into international markets, the company has
become a symbol of globalization and spread of the
American way of life. Now the company headquarters
are located in Oak Brook, Illinois. The company employs over 440,000 people worldwide
and their revenues are more than Subway and Yum! Brands combined. McDonalds has
restaurants in North and South America, Europe, Australia, Asia, the Middle East and Africa.
The main products are hamburgers, cheeseburgers, chicken meals, fries, coffee, and
milkshakes. Although these items are not seen as healthy, the company has made
tremendous efforts to educate consumer and add healthy organic items to their menus.
These include wraps and salads.

Currently, McDonalds is the leading global foodservice retailer with more than 34,000
local restaurants that serve approximately 69 million people in 119 countries around the
world each day. More than 80% of the restaurants worldwide are owned and operated by
independent local people.

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McDonalds History
12
 Strategic Direction

The alignment of the company, its franchises, and suppliers has been key to the companys
success. The business model enables McDonalds to deliver consistent, locally-relevant
restaurant experiences to customers and at the same time be an integral part of the
community. The companys model also enables it to identify and implement innovative
ideas that meet customers chaining needs and preferences. It provides a common
framework for global business but also allows for local adaptation. Its main strategy
consists of winning the five elements of people, products, place, price, and promotion.

McDonalds is now more aware than ever of the increasing trends of nutrition and fitness.
Whether its a quick breakfast, lunch or dinner, customers look for quality at a great value.
McDonalds goal is to continuously improve the classic offerings and increase the number
and variety of new options that deliver the great taste and balance that customers seek.

The company offers customers a way to learn about nutrition information. The company
has been guided by the Global Advisory Council to continue to evolve the overall approach
while still meeting customer expectations.

Outlook

OUTLOOK FOR 201310

McDonalds will continue to build the business in 2013 by enhancing customer experiences
across the pillars of their Plan and the three global growth priorities. This way they will be
able to optimize their menus, modernize their customer experiences and broaden
accessibility to the brand. The company possesses a brand advantage in convenience,
variety, value, and viable business model. McDonalds will highlight promotions of the core
menu items, while strategically expanding the menu with relevant new offerings. They will
also place an emphasis on scaling success quickly around the globe.

10
McDonalds 10-K
13
 In 2013 the U.S. business will focus on driving sales and guest counts by enhancing the
entire customer experience. The company will satisfy customer needs with the food they
crave by balancing core favorites with limited time offers an innovative products. Menus
will also include brand messages that highlight quality of food and ingredients, efforts to
promote children health and well-being of the community. Finally the company is
remodeling about 800 locations in the U.S.

In Europe the company sees growth opportunities in the breakfast menu and beverages.
Around 300 new restaurants will be opened in Europe in 2013. McDonalds believes that
despite the headwinds due to economic uncertainty and government austerity Europe
offers significant long-term opportunity and the company is positioned to capitalize on the
potential benefits.

Finally, in the rest of the world the companys goal is to make investments that elevate the
experience and drive sustainable growth. McDonalds focuses on markets that generate
acceptable returns or that have opportunities for growth.

Recommendation

HOLD
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 Pros to Recommendation

Strong brand because of increased spending in marketing and quality. McDonalds is

one of the worlds largest giants in the fast food industry. It has created strong customer
loyalty and reputation. With the increased healthy items on the menu and the
specialized items in each country the company serves more customers.
Economies of scale because the company counts with many different restaurants,
including franchises, around the world that help the company enjoy the benefits of
economies of scale.
Cohesive franchisee system that accounts for about 80% of the restaurants. MCD
receives a franchisee fee for each franchisee it leases.
An international growth opportunity since the company has been pursuing growth
opportunities in emerging markets. McDonalds targets each country differently. It
customizes products and expands into markets where there is an emerging middle class
that is willing to spend in Western foods.
High profit margins because the company counts with loss cost and higher priced
items that increase the profit margins.
Pays dividends that helps the fund pay-off investors and enjoy returns.
Market share leader since McDonalds owns 20.9% of the world market share of fast
food restaurants.

Cons to Recommendation

Slow but steady growth since the economy is bouncing up after the recessions and the
Fiscal Cliff uncertainty.
Vulnerable to currency exchange because McDonalds franchises and restaurants are
located all around the world. At the same time supplies are bought from all around the
jdlasKF;DAS
world so the company faces increased currency risks.
Trading at its 52 week high right now. MCD is not an attractive stock to purchase at
the moment, but because of the dividend yield and sustainable growth it is one to keep.
Overweight in the portfolio with regards to equity stocks.
Highly competitive industry affects revenues and growth potentials. Companies
competing in such a highly competitive industry are faced with increasing price

15
 rivalries and marketing expenses that reduce profit margins and in general the bottom
line.
Obesity propensity is currently becoming an issue. Increased health effects and social
media have made customer aware of the health factors associated with consuming
greasy fatty foods. Fast food restaurants need to increase their organic and healthy meal
options to compete in a society that is leaning towards healthier lifestyles

Analyst Recommendations
TRENDS:

Two Months Three Months

Current Month Last Month
jdlasKF;DAS Ago Ago
Strong Buy 5 5 5 4

Buy 10 10 10 11

Hold 13 13 13 12

Underperform 1 1 1 1

Sell 0 0 0 0

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 Cons to Recommendation
Ratio Analysis
R

Ratio Analysis Yum BKW SBUX

Profitability Ratios 2010 2011 2012 2012 2012 2012
Profit margin 20.5% 20.4% 19.8% 10.58% 5.99% 10.50%
Gross margin 45.8% jdlasKF;DAS
56.6% 56.3% 71.58% 64.80% 57.35%
ROA 15.5% 16.7% 15.4% 17.90% 2.11% 14.29%
ROE 33.8% 38.2% 35.7% 48.45% 10.52% 29.45%
Liquidity Ratios
Current 1.49 1.25 1.45 0.87 2.24 1.85
Quick 1.46 1.22 1.41 0.49 1.82 1.14
Debt Utilization
Debt to Equity 1.18 1.29 1.31 66.4 59.21 77.4
Leverage 2.18 2.29 2.31 4.49 5.02 1.64
Asset Utilization
Asset Turnover 0.75 0.82 0.78 1.02 0.35 1.71
Inventory Turnover 118.83 100.28 98.94 13.22 N/A 5.27
Valuation Ratios
P/E 15.4x 15.9x 17.3x 19.49 31.62 19.3
Price/Book 5.6x 7.2x 6.3x 13.55 4.9 7.7
Price/Cash Flow 12.9x 14.5x 13.8x 13.01 25.62 62
DuPont Analysis
Profit Margin 20.5% 20.4% 19.8% 10.58% 5.99% 10.50%
Asset Turnover 0.75 0.82 0.78 1.02 0.35 1.71
Leverage 2.18 2.29 2.31 4.49 5.02 1.64
ROE 33.8% 38.2% 35.7% 48.45% 10.52% 29.45%
ATIO ANALYSIS

Profitability Ratios

McDonalds is leading the industry with regards to profit margins. It went slightly down in 2012
because of the slight increase in tax expenses from 2011 to 2012. The company is slightly below
than competitors with regards to gross margins because McDonalds has been focusing on quality
and this has increased cost of goods sold slightly. Return on assets decreased slightly in 2012
because of total assets increased, but it is still a healthy one. Return on equity is healthy, although it
is slightly below its competitor Yum.

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Liquidity Ratios:

MCDs ratios are in line with competitors, but the company has slightly lower ratios than Burger
King. This is of no issue because the company has the ability to drive sales and produce cash to pay
debt quickly with promotions and advertisement.

Debt Utilization Ratios:

Debt to equity has increased slightly because of the increased growth into emerging economies. The
company does not finance its growth with debt as heavily as competitors. The company is at less
risk of bankruptcy than its competitors. Leverage is relatively low with regards to competitors as
well.

Asset Utilization Ratios:

Utilization ratios are very healthy. Asset turnover is a little lower than competitors because of the
lower profit margins with value meals and the healthy approaches they are expanding towards. On
the other hand, inventory turnover is extremely healthy. The company turns over inventory faster
than any other company in the industry. This is crucial in an industry where goods are perishable.
This can also be attributed to the pricing strategies they have and the number of clients that
consume McDonalds every day.

Valuation Ratios:

Valuation ratios are constantly growing but are relatively lower than the competitors. This
demonstrates that investors are willing to pay more each year for MCD stock. On the other hand,
they are willing to pay less than what they would for competitor stocks. This can be attributed to
the fact that competitors have greater growth opportunities. That being said, McDonalds is still a
market leader.

Assumptions

Revenue
I projected revenue taking into consideration the last three years averages and my opinion on how
fast the company is growing. Due to increase in disposable income and consumer spending, I find
18
jdlasKF;DAS
that a 4% growth rate is appropriate and conservative for the market leader in the fast food service
industry.

Cost of Revenue

I used an estimate based on previous years and management discussion to determine the cost of
revenue at about 44% of revenues.

Operating Expenses
I estimated operating expenses using the three year average and the percent of sales approach.

Taxes
I used a 31% tax taking into consideration management discussions and the three year average.

Risk Free Rate

I used the 30 year Treasury bond rate of 3.60%

Market Risk Premium

I used 5.7%, the 80-year historical rate.

Beta
For beta, I used several analyst opinions as guidance, but ultimately I used the beta I obtained from
my regression analysis.

Capital Expenditures
I estimated capital expenditures to decrease at approximately 12 each year, the average decline of
CAPEX over the last three years.

Dividends
I estimated future dividends based on 2012 dividend growth.

P/E
For the P/E ratio I used analyst opinions and value line estimates as guidance.

19
 Current Events

McDonald's Fails to Boost Sales With Dollar Menu

McDonald's managed to eke out a higher profit for its first quarter even as the world's biggest
hamburger chain failed to lift sales with its Dollar Menu.
jdlasKF;DAS
The company said Friday that an important sales measurement fell 1 percent during the period
and warned that it's expected to dip again in April.

That marked the first quarterly decline in a decade in sales at restaurants open at least 13
months and underscored the troubles the company has been facing.

As Burger King and Wendy's have stepped up their marketing over the past year or so,
McDonald's has responded by aggressively touting its Dollar Menu and other value deals to hold
onto customers in an industry where imitation is rampant.

The strategy has caused concern among analysts who worry that it could eat into profit margins.
It's also rankled some McDonald's franchisees, who operate the vast majority of its restaurants
in the U.S.

But in a conference call with analysts Friday, McDonald's executives insisted that offering
cheaper prices was necessary in the current climate. Since the restaurant industry is barely
growing, they said McDonald's needs to steal customers away from rivals to grow.

"That battle for market share has become so critical for the long-term health of business, we're
willing to sacrifice that margin," said Peter Bensen, the company's chief financial officer.

Although profit margins declined during the first quarter, McDonald's noted that it picked off
market share in many parts of the world, including the U.S.

But there are signs such deals aren't sitting well with the independent franchisees who operate
restaurants.

A survey by Janney Capital Markets released this week found that a sampling of 25 U.S.
franchisees who collectively operate 180 McDonald's restaurants on average rated their relations
20
with the company below their historic levels. Janney said some complained about excessive
coupons and discounts.

Meanwhile, McDonald's emphasis on the Dollar Menu, which began last year, has had a ripple
effect in the industry. Burger King recently said it's retooling its strategy and is now touting a
deal for a $1.29 Junior Whopper, among others. Wendy's also revamped its value menu last
year, saying it wants to offer customers more options.

The focus value menus and deals, which have long a staple in the traditional fast-food industry,
is in contrast to attempts by the same chains to evolve and adapt to changing tastes. As more
people flock to places such as Chipotle and Panera McDonald's has also tried to freshen up its
offerings and raise the image of its food. In addition to the chicken McWraps, for example, the
company is rolling out a version of its Egg McMuffin made with egg whites next week.

Such items are generally more expensive, and CEO Don Thompson noted that they could help
improve margins in coming quarters.

For the three months ended March 31, the global sales drop included a 1.2 percent decline in the
U.S. The sales figure fell 1.1 percent in Europe, the company's biggest region by sales.

It fell 3.3 percent in the region encompassing Asia, the Middle East and Africa, reflecting
weakness in Japan and a 4.6 percent drop in China. The company blamed the decline partly on
the aftereffects of the recent scare of the chicken supply for KFC, which is owned by Y um Brands
Inc.

McDonald's Corp., based in Oak Brook, Ill., has more than 34,000 locations worldwide, about
14,000 of those in the U.S.

For the quarter, it earned $1.27 billion, or $1.26 per share. That compares with $1.267 billion, or
$1.23 per share, a year ago.

Revenue edged up 1 percent to $6.6 billion.

Analysts expected a profit of $1.26 per share on revenue of $6.59 billion, according to FactSet.

Shares fell $1.99, or 2 percent, to close at $99.92 Friday.

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