Higher Prices for Burgers Help McDonald's Sales -- Update
24 October 2018 - 3:42AM
Dow Jones News
By Julie Jargon
McDonald's Corp. is still struggling to attract more U.S.
customers but it eked out higher sales this quarter by charging
more for its food.
The company has been trying to revive traffic growth in the U.S.
by upgrading restaurants, serving burgers made with fresh rather
than frozen beef and offering drinks for a dollar. The chain also
has been trying to make its food healthier by removing
preservatives from its burgers.
However, the 2.4% growth in same-store sales in its home market,
which was roughly in line with analysts' expectations, was largely
driven by higher-priced menu items.
Globally, the restaurant chain did better, beating expectations
for same-store sales growth, with a 4.2% increase, resulting in its
13th consecutive quarter of positive same-store sales growth
globally.
"The strength in markets outside the U.S. is encouraging when
considering broader concerns about slower economic growth," said
Baird analyst David Tarantino.
Shares in McDonald's rose by more than 5% in midday trading.
The chain's U.S. franchisees, who own roughly 95% of the
country's more than 14,000 restaurants, say the only way to grow is
to attract more customers into the restaurants.
But rival fast-food chains have been offering low-priced meals
at breakfast, which have been stealing share from McDonald's in the
critical morning hours, which account for about 25% of the chain's
U.S. sales. McDonald's is not only competing for diners with other
restaurants but also with food purchased for at-home
consumption.
"It continues to be a battleground. It's a market share fight on
traffic, " McDonald's Chief Executive Steve Easterbrook told
investors on Tuesday. "We want to do better at breakfast."
The company said it plans to introduce new breakfast items later
this year and to offer more regional breakfast deals.
A group of some 400 franchisees met recently to discuss forming
an independent association to address concerns about profitability.
The franchisees say they are worried about not seeing a return on
their investment from efforts to remodel restaurants, which the
company is accelerating.
McDonald's franchisees have been remodeling restaurants
throughout the U.S. to be more modern. Some stores have been
completely rebuilt while others have been upgraded with features
such as touch-screen order kiosks, mobile order pickup areas and
digital menu boards at the drive-through.
Mr. Easterbrook said the company is open to having discussions
with its franchisees about what it can do better.
McDonald's said it expects to add 600 new restaurants this year
and to have about $2.5 billion in capital expenditures for the
year. Of that amount, $1.6 billion will be for the U.S., up from
the $1.5 billion it had forecast in July. The company also said it
expects to complete about 4,000 additional remodeling projects in
the U.S. this year resulting in half of the total U.S. restaurants
being upgraded by the end of the year.
Closures or disruptions due to construction have resulted in
lost sales for many restaurants, according to franchisees. A report
from research firm Gordon Haskett found that once restaurants
completed the upgrades, customer traffic increased
considerably.
McDonald's Finance Chief Kevin Ozan acknowledged that the pace
of remodeling has been aggressive and that it represents the
largest construction project in the company's history. He said the
company is working to minimize the amount of time restaurants are
closed for remodeling.
McDonald's revenue fell 6.7% from the year-ago quarter to $5.37
billion due to the sale of more company-owned restaurants to
franchisees. The figure beat analysts' estimates. The company has
spent the past few years moving its business model toward one that
is owned mostly by franchisees, which it said gives it a more
stable and predictable revenue stream.
The company's third-quarter profit fell 13% to $1.64 billion. It
said earnings were $2.10 a share, down from $2.32 a share a year
ago. Excluding the impact of a prior year gain and restructuring
and impairment charges, earnings per share increased 19%. Earnings
beat analyst expectations.
--Allison Prang contributed to this article.
Write to Julie Jargon at julie.jargon@wsj.com
(END) Dow Jones Newswires
October 23, 2018 12:27 ET (16:27 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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