McDonald’s on Monday reported better-than-expected first-quarter earnings, as menu price increases fueled higher check averages in the U.S.
Although McDonald’s has been luring customers with a number of value deals, the larger tickets prove diners aren’t just looking for cheap eats.
Global same-store sales were also strong, rising 5.5 percent and topping estimates of 3.7 percent, as the number of customers coming through the door rose 0.8 percent.
Shares of the burger giant jumped more than 5 percent Monday, on pace for its best day in over a year.
“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,” CEO Steve Easterbrook said in a statement. “More customers are recognising that we are becoming a better McDonald’s.”
Here’s how the company performed:
- Earnings: $1.79 per share, adjusted, vs. $1.67 per share expected in a Thomson Reuters survey of analysts
- Revenue: $5.14 billion vs. $4.98 billion expected by Thomson Reuters
- Same-store sales: 2.9 percent increase in the U.S., in line with estimates from StreetAccount
McDonald’s has been deeply discounting its menu in the last few quarters, offering soft drinks for $1, McCafe beverages for $2 and a McPick 2 promotion, which allows customers to a mix-and-match two items for $5. In addition, it launched a new dollar menu at the beginning of the year, which contains a number of items for $1, $2 and $3 each.
Same-store sales in the U.S. grew 2.9 percent, in line with StreetAccount expectations.
Sales in the quarter were bolstered by customers opting for McDonald’s premium products, its pricier Signature Recipe Burgers, and an increase in the number of items ordered at one time, particularly from its Dollar Menu, Chief Financial Officer Kevin Ozan said during the company’s earnings call Monday.
A number of franchisees raised red flags last quarter, saying they expected the Dollar Menu and other promotions to drive checks lower and reduce their ability to control menu prices.
However, those worries were “overblown,” Morningstar analyst R.J. Hottovy said on CNBC’s “Squawk Box” on Monday.
“A lot of the other things they’ve been doing like delivery, mobile order and some of the other product innovations are really connecting,” he said.
Hottovy expects growth to continue, but McDonald’s will face more challenging comparisons as the year progresses.
McDonald’s is lapping tougher comparisons this quarter and that will continue throughout 2018.
Neil Saunders, managing director of GlobalData Retail, said the company will need to continue to offer new promotions and menu items to keep consumers interested.
“Diners now see the value options as a permanent fixture and are no longer as excited or stimulated by them. Indeed, some diners initially attracted by the deals are visiting far less often. This is also one of the reasons why cannibalization between McPick 2 and the main menu has dropped back slightly,” Saunders said, citing research that his firm has done.
International sales were strong, particularly in the U.K. and Germany. Many of these locations already have kiosks, mobile ordering and delivery, initiatives that McDonald’s is rolling out in the U.S., and are performing well, Hottovy said.
“It sets the stage for a pretty nice comp tailwind for the rest of the year,” he said.
It’s been more than a year since the company’s executives touted several big changes that the chain would be making to win back the more than 500 million visits it lost since 2012. This included innovating its menu, renovating its stores, offering mobile and kiosk ordering and partnering with UberEats to test delivery.
In the last quarter, Chief Financial Officer Kevin Ozan said the company planned to invest $2.4 billion of capital in 2018 toward its store renovations, which feature a modern design, kiosks and table service. Ozan said McDonald’s planned to open 1,000 new stores and bring its total number of renovated restaurants to 4,000.
“This quarter once again demonstrated the global strength of the McDonald’s brand and the momentum the brand is enjoying,” Peter Saleh, analyst at BTIG, wrote in a research note Monday. “We believe McDonald’s investment in [its new restaurant design], coupled with its new value platform and food quality initiatives will help the concept recover its 500 million lost transactions, recapturing nearly $2.7 billion in lost sales.”
In the quarter ended March 31, the company said net income rose to $1.38 billion, or $1.72 per share, up from $1.21 billion, or $1.47 per share, a year earlier.
Excluding items, the company earned $1.79 per share, better than the $1.67 per share analysts in a Thomson Reuters survey had expected.
The company’s revenue fell 9 percent to $5.14 billion, compared with the $5.67 billion it gained last year. Wall Street had expected revenue to be $4.98 billion, according to Thomson Reuters estimates.
McDonald’s blamed the decline in revenues on its refranchising efforts, which have been in the works for several years. The company has had a long-term goal of having 95 percent of its restaurants owned by franchisees. At the end of 2017, McDonald’s was 92 percent franchised.