MCD McDonalds Corp

By Heather Haddon 

McDonald's Corp.'s revenue fell as the fast-food giant sold company-owned stores to franchisees and operating income decreased as it restructured its operations.

The burger giant's revamped value menu and switch to higher-priced fresh beef contributed to higher average customer checks during the second quarter. Meal delivery also fueled sales.

But executives said that breakfast sales continued to underperform expectations and that competitors were wooing budget-minded customers with deals in response to McDonald's own lower-priced offers.

"We're not intending to lead any race to the bottom," Chief Executive Steve Easterbrook told investors Thursday. "We just want to be competitive on value."

Revenue of $5.35 billion in the quarter was down from $6.05 billion a year earlier, but above the $5.32 billion analysts expected. Operating income also decreased as a result of the company's restructuring.

Shares were off 2.3% at $155.29 in afternoon trading.

McDonald's executives said they are pushing ahead with renovations at more than a third of the company-owned restaurants in the U.S., while also introducing fresh beef and rolling out more menu deals. But they acknowledged that more needs to be done to drive traffic.

"We're not yet where we need to be but we're gaining," Mr. Easterbrook said.

McDonald's has been eliminating layers of management to trim costs and become more nimble. The plan involves providing more support for franchisees, helping them manage expenses and figuring out ways to boost sales. Previously, franchisees were graded by metrics such as restaurant cleanliness and service.

The Oakbrook, Ill.-based company said selling restaurants to its franchisees hurt second-quarter revenue, which fell 12% from a year earlier. McDonald's said it recorded a pretax charge of $92 million in the quarter because of employee severance costs and other costs associated with closing field offices.

McDonald's reported net income of $1.5 billion, or $1.90 a share, including charges related to the restructuring, up from $1.4 billion, or $1.70 a share, a year earlier. Analysts were expecting earnings per share of $1.92.

Same-store sales grew 4% globally and 2.6% in the U.S. during the quarter. U.S. sales, which the company said were partially driven by price increases, missed analyst expectations of 3% growth for stores open more than a year

McDonald's said in the first quarter that rising commodity costs around the globe were pressuring the company to raise prices, and it said some food and labor costs continued to rise in the second quarter.

The chain said it would roll out a two-for-$5 offer on some sandwiches next month, and continue to tweak the value menu.

Competition in the breakfast business, which represents approximately 25% of McDonald's sales, has also been a challenge for the company. McDonald's in March began offering two breakfast sandwiches for $4.

McDonald's said sales growth resumed for its breakfast offerings in the second quarter, but that the chain would continue to introduce deals to compete at that meal.

Meal delivery was a bright spot for McDonald's, with growth in sales fueled by its partnership with Uber Eats.

A new challenge for the company was finding a new supplier for its salads at some 3,000 restaurants mostly in the Midwest, where federal and state health officials are investigating a cyclospora outbreak tied to McDonald's. The chain pulled all of its salads from those restaurants.

McDonald's said that it its new supplier is now serving all the impacted restaurants, and it didn't expect the outbreak to materially impact sales.

The company said it didn't expect the outbreak to materially impact earnings, and that it was responding to the food-safety scare.

McDonald's said Thursday it gave $2.5 billion to shareholders through share repurchases and dividends. The federal tax law changes have given companies new sources of cash to boost its stock through share repurchases.

--Julie Jargon contributed to this article.

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

(END) Dow Jones Newswires

July 26, 2018 14:06 ET (18:06 GMT)

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