Low-Price Menu Gives McDonald's a Lift -- WSJ
January 31 2018 - 03:02AM
Dow Jones News
By Julie Jargon
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (January 31, 2018).
McDonald's Corp. gained sales again by luring core customers to
its cheapest meals and drinks.
The burger giant attributed U.S. sales growth in the fourth
quarter to a "McPick 2" meal deal and low-price beverages, as well
as to higher-priced Buttermilk Crispy Tenders. The chain introduced
a new nationwide value menu this month with items priced at $1, $2
and $3, hoping consumers drawn in for cheap sodas and burgers will
also order more expensive items.
The company grew guest counts by 1.9% last year, the first full
year of increasing same-store traffic in five years. Same-store
sales rose for the 10th consecutive quarter.
"Customers tell us that we are now simply enhancing their
McDonald's experience by being more attentive to their needs and
serving hotter and fresher food," Chief Executive Steve Easterbrook
told investors on Tuesday.
But some franchisees worry the strategy isn't sustainable. In a
recent anonymous survey conducted by Instinet, many McDonald's
franchisees in the U.S. said they fear low-price items will eat
into their profits, especially as commodity prices rise. One
franchisee said the new menu is "good for buying guest counts" but
isn't likely to be profitable. Another predicted that the new
dollar menu won't last the year.
To help protect margins, the company said it has raised menu
prices outside the Dollar Menu.
Mr. Easterbrook said there is more to McDonald's turnaround than
cheap eats. The company has been transforming thousands of outlets
into what it is calling "Experience of the Future" restaurants with
self-order kiosks, table service and updated décor, including
McCafe bars with new pastries.
Mr. Easterbrook said savings from the tax overhaul will help
accelerate plans to bring those features to an additional 4,000
restaurants this year, bringing the total number of upgraded U.S.
restaurants to approximately 7,000, half of U.S. locations. The
company and its franchisees will invest $6 billion over the next
two years in these and other U.S. upgrades.
McDonald's said its effective U.S. tax rate will fall to between
25% and 27%, down from its historic rate of between 31% and 33%,
resulting in up to $500 million in annual savings before the
investments. McDonald's said it expects to return $24 billion to
shareholders in the three-year period ending in 2019.
Fourth-quarter same-store sales rose 5.5% globally and 4.5% in
the U.S., its biggest market. Both figures beat estimates. While
adjusted earnings also rose, revenue dropped 11% from a year ago to
$5.34 billion, stemming from the sale of company-owned restaurants
to franchisees.
Overall for the quarter, McDonald's reported a profit of $698.7
million, or 87 cents a share, compared with $1.19 billion, or $1.44
a share, a year ago. Excluding charges related to the new U.S. tax
law, the company earned $1.71 a share, up from $1.43 in the
year-earlier period. Analysts had expected adjusted earnings per
share of $1.59.
The company booked a $1.2 billion tax charge related to foreign
earnings, partly offset by a $500 million benefit from revaluing
deferred tax assets and liabilities due to the new lower corporate
tax rate.
Cara Lombardo contributed to this article
Write to Julie Jargon at julie.jargon@wsj.com
(END) Dow Jones Newswires
January 31, 2018 02:47 ET (07:47 GMT)
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