McDonald's Falls Short on Profit -- 4th Update

Date : 10/23/2019 @ 2:36AM
Source : Dow Jones News
Stock : McDonalds Corp (MCD)
Quote : 192.64  -0.97 (-0.50%) @ 1:00AM
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Last $ 192.60 ▼ -0.04 (-0.02%)

McDonald's Falls Short on Profit -- 4th Update

McDonalds (NYSE:MCD)
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By Heather Haddon 

McDonald's Corp. needed promotions and price increases to help boost sales in the third quarter as the world's biggest burger chain by revenue works to lure more customers.

Shares of McDonald's, up 18% in 2019 through Monday's close, slid 5% Tuesday as quarterly earnings and U.S. sales fell short of expectations.

The company said same-store sales grew 5.9% globally in the quarter, above the 5.4% that analysts polled by FactSet were expecting. But U.S. sales, growing by 4.8%, were down from the previous quarter and below analysts' expectations.

It still took offerings and promotions, along with a nearly 3% increase in menu prices in the U.S., to boost sales, the Chicago-based company said. McDonald's Chief Executive Steve Easterbrook told investors Tuesday that renovated stores, digital kiosks and technology investments are helping to boost sales and visits, even if they are siphoning off profits to implement.

"The world is different than it was in 1955," Mr. Easterbrook said, referring to when McDonald's began franchising. "We're keenly aware that we have to be out ahead of these changes."

Restaurants across the industry have increased menu prices to help boost sales as labor and other expenses grow. Consumer prices for food served at restaurants have grown recently by 3.2%, an increase not seen since 2009, Labor Department data show.

Fast-food competition continues to be intense, particularly for burger-focused chains.

Visits to U.S. fast-food burger restaurants were down 1% in the year ended in August, according to research firm NPD Group Inc. That was weaker than the average for fast-food restaurants, which saw a 1% increase during the period.

Mr. Easterbrook said McDonald's grew its share of the burger market during the quarter, but lost out in other areas, including chicken.

McDonald's was largely an afterthought during the so-called chicken sandwich wars that bubbled up late this summer, and the company said Tuesday that it noticed competitive pressure heighten during the period. "We did go a little bit the opposite way on chicken," Mr. Easterbrook said.

McDonald's last month tested a new spicy buttermilk chicken sandwich as it seeks to compete with crispy poultry offerings from Popeyes Louisiana Kitchen and Chick-fil-A.

It has been fighting for years to boost customer visits. U.S. customer transactions continued to drop in the quarter ended in September, though they grew overall globally.

McDonald's has struck a number of technology deals this year to try to boost sales and improve operations. But those deals are driving up expenses. The company said Tuesday that administrative expenses grew 6% during the quarter, and McDonald's now expects those costs to grow by 1% to 2% during the fiscal year. Previously, the company expected those costs to be flat for the year.

McDonald's executives said they expect the drag from technology spending to be short term, and that digital kiosks, mobile ordering and other technology investments are now boosting sales.

"Our belief is those who aren't investing in technology, at some point will be behind," McDonald's Chief Financial Officer Kevin Ozan said.

The burger chain acquired Silicon Valley-based tech startup Apprente last month to tap the company's voice-activated technology to try to speed up service in its drive-throughs. McDonald's acquired Israeli startup Dynamic Yield earlier this year to use AI in suggestive ordering, and is now operating in more than 9,500 U.S. restaurant drive-throughs.

McDonald's has placed increasing emphasis on delivery, striking deals with DoorDash Inc. and Grubhub Inc. to bolster its existing to-go business with Uber Technologies Inc.'s Uber Eats division.

Delivery comes with a hit on restaurant margins, something McDonald's franchisees have pushed back on and the company has sought to address through its negotiations with third-party operators.

McDonald's expects delivery to account for $4 billion in sales globally by year-end, with an order for its food now placed every 10 seconds.

McDonald's is following competitors into the plant-based meat craze. The company last month announced it is testing sandwiches with Beyond Meat Inc. patties in Canada.

"We're interested in this clearly," Mr. Easterbrook said about plant-based offerings.

McDonald's faces growing competition in key parts of the business. Breakfast, a part of the day it once dominated with Egg McMuffins and hash browns, has seen rival chains pile in as they also hunt for growth.

Mr. Easterbrook said the chain has seen some improvement in breakfast sales in the most recent quarter, but that part of the day remains competitive and will get more so as Wendy's Co. rolls out morning meals nationally next year.

Earnings of $1.6 billion were down 2% from a year earlier when accounting for currency fluctuations. The company reported earnings per share of $2.11 and sales of $5.4 billion. Analysts polled by FactSet expected earnings per share of $2.21 adjusting for one-time items, and $5.5 billion in sales.

Company executives said the income miss was minimal, while they chalked up differing ways of calculating margins to the gap with analysts on earnings. Lower gains in sales of company-owned stores in the U.S. contributed to the miss, McDonald's said.

Write to Heather Haddon at heather.haddon@wsj.com

 

(END) Dow Jones Newswires

October 22, 2019 22:21 ET (02:21 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.

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