This morning, McDonald’s Corporation (NYSE:MCD) wiped away any lingering doubt over the problems that weighed it down just a few years ago. McDonald’s earnings beat expectations on both the top and bottom line. And MCD stock jumped in response.
The restaurateur has found its former mojo.
Granted, some structural changes implemented last year may have helped. Analysts didn’t really know what to expect numbers-wise,from McDonald’s earnings. Same-store sales numbers are a huge indication of how the company is clicking with consumers though. And on that front, McDonald’s is clearly doing it right.
For the first quarter, McDonald’s brought in $1.79 earnings per share on $5.14 billion in revenue. The bottom line was up from the year-ago figure of $1.47, when the restaurant chain drove $5.67 billion worth of sales, but analysts were only calling for a top line of $4.9 billion and earnings of $1.67 per share of McDonald’s stock.
Perhaps most important, same-store sales in the United States were up 2.9%, in line with expectations, while global same-store sales grew 5.5% year-over-year versus a forecast of only 3.6%.
Take the shrinking revenue figure with a grain of salt. The company has been selling company-owned locations to franchisees. Outright ownership generates more sales than franchise fees contribute, but franchising — rather than owning — yields higher margins.
CEO Steve Easterbrook said of the Q1 numbers:
“We continued to build upon the broad-based momentum of our business, marking 11 consecutive quarters of positive comparable sales and our fifth consecutive quarter of positive guest counts. More customers are recognizing that we are becoming a better McDonald’s, appreciating our great tasting food, fast and friendly service and compelling value as we execute our Velocity Growth Plan.”
Silencing the Critics
Headed into Monday morning’s earnings report, investors weren’t exactly optimistic. The 5% jump for MCD stock illustrates the depth of their surprise.
Better still, the quarterly report largely silences the critics that assumed the fast food giant was fighting an uphill battle it could never win simply because consumers — and consumer preferences — had changed forever.
Case in point: NPD Group analyst Bonnie Riggs recently observed: “It’s clear that major restaurant chain operators are pulling out all of the stops to get consumers to visit this year.”
And it’s true. McDonald’s rival Yum! Brands, Inc. (NYSE:YUM) now offers ‘Dollar Cravings’ items, and Wendys Co (NASDAQ:WEN) offers low-cost ‘value’ choices as well. Indeed, they’ve been around for so long and are now so common, GlobalData Retail’s Managing Director Neil Saunders believes it “is clear that diners now see the value options as a permanent fixture and are no longer as excited or stimulated by them.”
The company’s menu mix is still one that works for it though. And it saw its average ticket price rise last quarter as a result of price increases outside of its value-oriented offers. Among those well-received choices were custom-made “gourmet” burgers that can cost up to $7 each.
Bottom Line for McDonald’s Earnings
Is McDonald’s as bulletproof as it seems after Monday’s earnings report? MCD is clearly doing something right.
There is, however, one noteworthy risk current and would-be owners of McDonald’s stock may want to chew on. That is, the effort to push towards more franchisees and fewer corporate-owned units is slowly but surely alienating all-important franchisee partners.
There’s no arguing McDonald’s is the most recognizable quick-service restaurant chain on the planet. It’s an honor just to be approved to own and operate one. Increasingly though, franchisees are finding it more and more difficult as well as more and more expensive to comply with the minimum expectations of the parent company.
The advent of the “$1, $2, $3” menu items is one example. As one unnamed operator explained, “This price point, in light of labor costs and food & paper costs, will be hard for competitors to match long term. This will succeed at a major promo cost to owner/operators.”
That’s largely why McDonald’s was more profitable last quarter despite weaker revenue. It pushed the cost-management problems off on franchisees, and not for the first time.
Its partners so far have adapted, but each added layer of difficulty and expense, but each added burden makes a franchise less desirable to operate.
Still, while it’s something to keep tabs on, it’s not yet enough of reason not to own McDonald’s Stock.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.