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Gas prices, economy hit McDonald's May sales

A McDonald's restaurant's drive-thru sign is pictured in Los Angeles
A McDonald's restaurant's drive-thru sign is pictured in Los Angeles

By Lisa Baertlein and Phil Wahba

LOS ANGELES/NEW YORK (Reuters) - McDonald's Corp reported a lower-than-expected rise in May sales at established restaurants as high gasoline prices crimped U.S. spending and Europe's economic woes weakened results from Germany.

May sales in Europe and the United States -- its biggest markets for sales -- fell short of Wall Street's targets. Shares of the world's biggest hamburger chain rebounded after falling slightly in early trading on Wednesday.

Sales at U.S. restaurants open at least 13 months rose 2.4 percent, less than the 2.8 that analysts polled by Thomson Reuters were expecting.

"The unemployment report on Friday showed the economy is growing more slowly," said Lazard Capital Markets analyst Matthew DiFrisco. "We're looking at a May number that was influenced by higher gasoline prices."

Roughly 800 of McDonald's 14,000 U.S. restaurants are located by interstate highways, and those outlets have been feeling some pressure because of gas prices, McDonald's spokeswoman Heidi Barker said.

McDonald's shares rose 9 cents to $81.23 in afternoon trading on the New York Stock Exchange. Shares of rivals Wendy's/Arby's Group Inc and YUM Brands Inc , were off slightly.

NO IMPACT FROM E.COLI

Same-restaurant sales for Europe, which contributes about 40 percent of McDonald's revenue, were up 2.3 percent. That was less than the 4.2 percent gain analysts expected.

Germany "has been a volatile market when it comes to the economy and consumer spending," said Barker. She declined to give the specific sales result for Germany.

The northern German city of Hamburg has been ground zero for an E.coli outbreak that has killed 24 people and infected thousands since early May. Health officials have not pinpointed the source of contamination, but raw vegetables have topped the list of suspects.

The outbreak had no impact on McDonald's sales in Germany and its food has not been implicated, Barker said.

The E.coli outbreak in Germany could weaken restaurant results for June, Jefferies & Co analyst Andy Barish said in a client note.

In the United States, its lower income diners remain sensitive to economic shocks that reduce their disposable income. As a result, its Dollar Menu and other, lower-priced meals have resonated with consumers coping with unemployment and higher costs for groceries and fuel worldwide.

May comparable sales were up 4.3 percent in McDonald's Asia/Pacific, Middle East and Africa unit, beating analysts' 3.4 percent estimate. McDonald's said the gains were led by a strong performance in China.

McDonald's reported strong results in May 2010, so it had a high hurdle to clear this year. In May 2010, same-restaurant sales were up 3.4 percent in the United States, 5.7 percent in Europe and 3.8 percent in the Asia/Pacific region, the Middle East and Africa.

The company has raised prices in the United States and Europe and announced plans to follow suit in China. Those moves should help offset higher food costs, which are expected to rise 4 percent to 4.5 percent in the United States and Europe this year.

Because of its large size -- McDonald's has more than 32,000 restaurants in more than 100 countries -- it saves money by buying in bulk everything from food to advertising. McDonald's operators are beating most of their fast-food rivals and many are using profits to spruce up their restaurants.

(Additional reporting by Phil Wahba in New York; Editing by John Wallace, Maureen Bavdek and Robert MacMillan)

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