McDonald's Earnings Beat Expectations -- 2nd Update
July 25 2017 - 3:01PM
Dow Jones News
By Julie Jargon
McDonald's Corp.'s bet that low prices will bring in customers
is paying off for now.
The burger giant, which beat analysts' expectations in the
second quarter, said its $1 drinks promotion and a new line of
burgers helped reverse a sales slump in its U.S. business.
But price promotions can't drive sales over the long term, and
the company said it isn't relying on short-term tactics to retain
customers. After losing customers to rival fast-food chains in the
last few years in an increasingly competitive fast-food market,
McDonald's decided it needed to first get customers back in the
restaurants.
"It's a market share fight," Chief Executive Steve Easterbrook
told investors on Tuesday, explaining that McDonald's has gained
back some of the customers it had lost.
McDonald's has been introducing new menu items priced with its
core, budget-conscious customers in mind and adding more
conveniences like self-order kiosks, food delivery and a mobile
order and payment app. It has also been remodeling many of its
restaurants. Those moves are all longer-term changes the company
said it hopes will keep customers coming back.
"People had quit giving McDonald's a chance," said Trip Miller,
managing partner at Gullane Capital Partners, a Memphis-based
investment firm that owns shares of McDonald's. "To get people to
see the changes you're making, you have to drive them in the door.
They may not be getting as fast of an experience as they were a
year or two ago but it's a higher quality experience."
McDonald's speed of service has been declining, Mr. Easterbrook
confirmed with analysts. But order accuracy and quality perception
scores have improved, he said, adding that he hopes the self-order
kiosks and mobile-order and pay app will shave seconds off order
times.
The chain reported better-than-expected domestic same-store
sales growth in the second quarter, contributing to the strongest
global same-store sales and traffic growth in more than five
years.
Revenue fell for the quarter, however, as McDonald's sold more
of its restaurants to franchisees and is no longer collecting the
full amount of revenue from them, the company said.
Investors cheered the results, sending McDonald's shares up 5.2%
to $159.74.
McDonald's recently found that most of the consumers it had lost
in recent years had defected to rival fast-food chains serving
cheaper food rather than the higher-priced fast-casual restaurants
it had been trying to emulate with healthier items such as salads
and snack wraps.
The company said its renewed focus on the fast-food customer led
to its recent decision to begin using fresh, rather than frozen,
beef in its quarter-pound burgers. It is currently rolling out a
line of semi-customizable burgers topped with different ingredients
than the usual tomatoes and lettuce. Those burgers, while more
expensive than its Big Macs, are a lot cheaper than the ones sold
by "better burger" restaurants such as Five Guys.
Executives said they need to be careful about not raising menu
prices too much. Restaurants in the last year have taken a hit as
customers found it much cheaper to eat at home than to eat out. The
gap between the cost of food-at-home and away widened considerably
last year as a number of key commodities prices dropped.
McDonald's finance chief, Kevin Ozan, said he is carefully
monitoring key inflation indexes to make sure McDonald's price
inflation remains below that of food-at-home.
The company has placed a tight focus lately on operations, with
plans to encourage underperforming franchisees to sell their
restaurants to better-performing ones, resulting in fewer, better
operators. RBC Capital Markets, which expects more than 1,000
McDonald's in the U.S. to change hands, says the move could prove
to be a "powerful sales driver."
McDonald's also agreed to put up 55% of the cost of certain
restaurant upgrades if franchisees agreed to fund an advertising
campaign for a national value menu.
The majority of its U.S. franchisees approved the advertising
funding and will be renovating their restaurants to include new
dessert counters and self-order kiosks.
McDonald's reported net income of $1.4 billion, or $1.70 per
share, up from $1.09 billion, or $1.25 per share a year ago.
Analysts were expecting earnings per share of $1.62.
Revenue for the quarter totaled $6.05 billion, down from $6.27
billion last year, but above the $5.96 billion analysts expected.
Same-store sales rose 6.6% globally and 3.9% in the U.S., beating
expectations of 3.7% and 2.9%, respectively.
Write to Julie Jargon at julie.jargon@wsj.com
(END) Dow Jones Newswires
July 25, 2017 14:46 ET (18:46 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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