<!--:es-->McDonald’s set to sell rest of Chipotle<!--:-->

McDonald’s set to sell rest of Chipotle

...Earnings up 57 percent; World Cup boosts European sales

CHICAGO – McDonald’s Corp. Tuesday said it will sell its remaining stake in Chipotle Mexican Grill Inc. by the end of October to focus on its hamburger restaurants, where new menu items and World Cup promotions helped drive a 57 percent rise in quarterly profit.

The world’s largest restaurant chain reported higher second-quarter margins and strong sales, particularly in Europe, as the World Cup soccer tournament lifted demand in host country Germany.

“Europe’s 6.3 percent comparable-sales increase was the strongest quarterly result in more than 10 years,” McDonald’s chief executive Jim Skinner said in a statement. “We are pleased with Europe’s improving profitability and remain intent on building upon these strong results.”

Shares of McDonald’s, a Dow 30 component, edged up, largely because there were no major surprises as the company had released preliminary earnings figures last week.

Analysts said they were particularly pleased that the number of shares outstanding declined, easing concerns about hefty stock option grants that had weighed on the stock price in previous quarters.

David Palmer, an analyst with UBS Investment Research, said the 2 percent decline in the share count “suggests that two-plus years of stock option overhang is diminishing, paving the way for higher dividends going forward.”

“In the long term, we believe McDonald’s can allocate two-thirds of its free cash to dividends, vs. one-third today,” he wrote in a note to clients.

Selling the stake in Chipotle, known for its freshly prepared fast Mexican food, will also help reduce the share count because McDonald’s plans to use the proceeds to buy back its own stock.

The Oak Brook, Ill.-based company said it plans a tax-free exchange of Chipotle shares for McDonald’s stock, and will file a registration statement with the Securities and Exchange Commission in the coming weeks.

“This will allow us to buy back McDonald’s shares using highly appreciated Chipotle stock with no tax on the appreciation,” Matthew Paull, McDonald’s chief financial officer, said on a conference call with analysts.

Chipotle’s stock has more than doubled from its $22 initial public offering in January to more than $51 as of Tuesday.

McDonald’s had previously said it would dispose of its remaining Chipotle stake by the end of the year, but this was the first time it had given an October date.

The most recent disclosure about McDonald’s ownership in Chipotle was in June 30 regulatory filing where the company said it had a 51 percent stake. That would equal about 15.8 million shares worth about $820 million at the current stock price.

Analysts were also encouraged by McDonald’s 12 percent increase in operating income and its vow to keep buying back stock. McDonald’s reiterated that it expects to return at least $5 billion to $6 billion to shareholders through dividends and share repurchase in 2006 and 2007 combined.

McDonald’s confirmed that second-quarter net income rose to $834.1 million, or 67 cents per share, from $530.4 million, or 42 cents per share, in the same period a year earlier.

Excluding income from the sale of some Chipotle shares and expense from a tax law change, earnings were 59 cents per share in the latest period, also in line with last week’s preliminary figure.

McDonald’s has been adding premium items such as an Asian chicken salad in an effort to boost sales. A recent Happy Meal promotion tied to the animated movie “Cars” also lifted demand in the latest period.

Analysts have also pointed out that McDonald’s may be benefiting from a slowing U.S. economy as consumers trade down from higher-priced restaurants.