McDonald’s Turnaround Revs Up Abroad as Sales Top Estimates
(Bloomberg) -- McDonald’s Corp. Chief Executive Officer Steve Easterbrook has more tricks up his sleeve than serving Egg McMuffins all day.
A series of upgrades at the company’s international locations -- including technological advances like self-service kiosks -- boosted sales in some of the restaurant’s chains biggest markets abroad and helped third-quarter results beat analysts’ expectations.
While the introduction of all-day breakfast has revived McDonald’s fortunes in the U.S. over the past year, the world’s largest restaurant company has said its turnaround is even further ahead in international markets like the U.K. and Germany. The strong results there last quarter -- and the fact that many of those innovations have yet to take hold at McDonald’s domestic locations -- signal that the U.S. business may continue to improve, said Michael Halen, an analyst at Bloomberg Intelligence.
“For the doubters who think this is just a bump from all-day breakfast, they can point to those markets,” he said. “It’s a good sign for the U.S.”
Revenue was $6.42 billion in the period ended Sept. 30, the Oak Brook, Illinois-based company said in a statement on Friday. Analysts estimated $6.28 billion, on average. Globally, comparable-stores sales rose 3.5 percent, while analysts projected a 1.5 percent gain, according to Consensus Metrix.
The shares increased as much as 3.5 percent to $114.42 in New York, the biggest intraday gain in a year. Through Thursday, McDonald’s had dropped 6.4 percent this year.
McDonald’s, which generates about two-thirds of its revenue from outside the U.S., got the biggest boost last quarter from its business abroad. The international lead markets unit -- which encompasses the U.K., Canada, Australia and Germany -- boosted same-store sales 3.3 percent. That topped analysts’ 1.8 percent average projection.
The foundational markets segment, which includes Japan, posted a 10.1 percent comparable-sales increase. Analysts estimated a 2.4 percent gain. In McDonald’s high-growth unit, including China and Russia, comparable-store sales climbed 1.5 percent. Analysts had estimated an increase of 0.5 percent.
Those advances outpaced the 1.3 percent increase in U.S. same-store sales, which topped analysts’ 1.2 percent average estimate. Still -- with the help of steep discounting, faster kitchens and all-day breakfast -- the performance marked the domestic business’s fifth straight quarter of gains.
McDonald’s raised prices about 3.5 percent in the U.S. during the quarter, even as the cost of its commodities, like beef and dairy, slipped 6 percent. Grocery prices have now fallen for 10 straight months, a streak of food deflation not seen since 1960. Easterbrook noted that the price gap between dining out and eating at home is the largest it has been in more than 30 years. Still, slow wage growth, higher health-care costs and issues with consumer confidence are bigger factors weighing on sales in the fast-food industry, he said.
“When you’re a lower-average-check business like we are, I don’t think that magnifies out the same as if we were mid-scale dining or fine-end dining,” he said. “I think there are broader macroeconomic issues of consumer confidence.”
McDonald’s has been refranchising restaurants, or selling them to independent owners, to try to reduce its risk and trim overhead costs. There are plans to sell about 4,000 locations by the end of 2018. McDonald’s has more than 36,000 locations globally.
Profit last quarter was $1.62 a share, excluding some items. Analysts estimated $1.48, on average. Last week, McDonald’s said its turnaround plan added about $130 million in pretax expenses, amounting to a charge of 12 cents a share, to its third-quarter results.
Since becoming CEO last year, Easterbrook also has shaken up corporate management, cut jobs and announced that the company’s headquarters is moving to downtown Chicago by the spring of 2018.
Hoping to draw more health-conscious and younger consumers, the chain also has focused on improving its fare. It switched to real butter on its Egg McMuffins instead of margarine, removed high-fructose corn syrup from its buns and is getting rid of some antibiotics from its chicken. The chain also pulled artificial preservatives from its popular chicken McNuggets, a move that pushed up sales up nearly 10 percent last quarter, according to Easterbrook.
Still, the move may not be enough to appease Americans who are increasingly flocking to fast-casual chains such as Panera Bread Co.
“Customers today are more informed and demand greater choice and variety when they dine out,” Easterbrook said in Friday’s statement. “That’s why we’re evolving the McDonald’s experience to provide more high-quality, affordable food and beverage options and convenient solutions for customers on the go.”