MCD McDonalds Corp

By Julie Jargon 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (October 24, 2018).

McDonald's Corp. is still struggling to attract more U.S. customers but it eked out sales gains in the latest quarter by charging more for its food.

The company has been trying to revive traffic growth in the U.S. by upgrading restaurants, serving hamburgers 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% third-quarter growth in same-store sales in its home market -- roughly in line with analysts' expectations -- was largely driven by menu price increases prompted in part by a 3% rise in commodity costs for the quarter.

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 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 6.3% on Tuesday.

U.S. franchisees, who own roughly 95% of the company's more than 14,000 restaurants in the country, say the only way to grow is to attract more customers. But rival fast-food chains have been stealing share from McDonald's in the morning hours, which account for about 25% of the chain's U.S. sales, by offering low-priced breakfast meals.

McDonald's also is losing out to food purchases 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.

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 discussing with its franchisees what it can do better.

McDonald's said that this year it expects to add 600 new restaurants and log about $2.5 billion in capital expenditures. Of that amount, $1.6 billion will be for the U.S., up from the $1.5 billion it forecast in July.

The company said half of all McDonald's restaurants in the U.S. are expected to be upgraded by year-end in what it characterizes as the largest construction project in the chain's history.

Closures or disruptions due to construction have resulted in lost sales for many restaurants, according to franchisees. McDonald's finance chief Kevin Ozan acknowledged that the pace of remodeling has been aggressive and said the company is working to minimize the amount of time restaurants are closed for remodeling.

A report from research firm Gordon Haskett also found that once an upgrade was completed, customer traffic increased considerably.

McDonald's revenue fell 6.7% from the year-earlier quarter to $5.37 billion on the continued sale of restaurants to franchisees. The company has spent the past few years moving its business model toward one based on franchisees, which it said provides a more stable and predictable revenue stream.

The company's third-quarter profit fell 13% to $1.64 billion, with per-share earnings falling to $2.10 from $2.32 a year earlier. Excluding a prior-year gain and restructuring and impairment charges, earnings per share increased 19% and beat analyst expectations.

--Allison Prang contributed to this article.

Write to Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

October 24, 2018 02:47 ET (06:47 GMT)

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