McDonald's same-store sales climb as promotions lure customers

Key Points
  • McDonald's reports adjusted earnings of $1.76 a share, compared with a forecast profit of $1.77.
  • Revenue was $5.8 billion, versus an estimate of $5.7 billion.
  • Same-store sales in the U.S. climbed 4.1 percent, better than the expected 3.6 percent growth.
McDonald's modernization plans in the works: Morningstar analyst
McDonald's modernization plans in the works: Morningstar analyst

McDonald's reported better-than-expected sales at its established restaurants during the third quarter, as its promotions and fresh food offerings drew more customers.

Here's what McDonald's reported compared with what Wall Street was expecting, based on a Thomson Reuters survey of analysts:

  • Adjusted earnings per share of $1.76, compared with a forecast profit of $1.77.
  • Revenue was $5.8 billion, versus an estimate of $5.7 billion.
  • Same-store sales in the U.S. climbed 4.1 percent, better than the expected 3.6 percent growth.

McDonald's shares were up 1.4 percent Tuesday morning.

"The U.S. comp number is really encouraging, and the key thing is that [this is] even with the impact of hurricanes within the quarter," Morningstar's R.J. Hottovy told CNBC's "Squawk Box." "The new initiatives they put in place seem to be working."

The chain's national cold beverage value promotion, for example, offered soft drinks for $1, and its new Signature Crafted sandwiches were priced at $5 to $7, each. McDonald's McPick 2 deal, which lets customers buy two menu items for $5, was also seen boosting sales in the latest period.

Last month, data tracker M Science warned that the Illinois-based burger chain could have been hurt by Hurricanes Harvey and Irma. The firm issued a sales forecast that was weaker than other Wall Street analysts at the time.

However, McDonald's on Tuesday showed that its promotions were able to offset some of those negative impacts.

"We are serving more customers, more often by offering great tasting food at a good value with the quick service and friendly hospitality they expect from McDonald's," President and Chief Executive Steve Easterbrook said in a statement.

"Our positive comparable sales and guest counts across all of our operating segments during the third quarter demonstrate broad-based momentum throughout our business that builds upon our strong first half of 2017," Easterbrook added.

McDonald's net income rose to $1.88 billion, or $2.32 per share, in the third quarter, from $1.28 billion, or $1.50 per share, one year ago. Excluding one-time charges, McDonald's earned $1.76 per share.

Sales at U.S. restaurants open at least 13 months rose 4.1 percent, while global comps were up 6 percent during the period.

Total revenue came in at $5.75 billion, down 10 percent from a year earlier due to charges related to a refranchising initiative, McDonald's said.

During the latest quarter, McDonald's finished refranchising its businesses in China and Hong Kong, completing the switch at 4,000 restaurants "more than a year ahead of schedule," according to Chief Financial Officer Kevin Ozan.

"Our more heavily franchised structure will continue to drive shareholder value by providing a more stable revenue and income stream with higher returns on invested capital," Ozan said in a statement.

Franchising cuts the cost of operating those stores while adding more predictable rent and royalty payments for the business.

McDonald's focus continues to be on menu innovation, store renovations, digital ordering and delivery as it works to achieve sustained growth and attract more customers. One example of this is McDonald's growing its McDelivery program with Uber's UberEATS.

"Improvements to restaurants are also helping to shift perceptions of McDonald's," GlobalData Retail Managing Director Neil Saunders wrote in a note to clients.

"Refurbished locations project a modern image and are also spaces that help attract new diners, especially family segments and younger age groups," Saunders said. "Better displays of products like snacks and treats have also boosted sales in categories where McDonald's has traditionally been lackluster."

By the end of 2020, Saunders said, most of McDonald's restaurants will have been "enhanced" with technology upgrades. And this should drive U.S. same-store sales even higher, according to Hottovy.

McDonald's is in the midst of adding more kiosks to its stores and launching mobile order and pay.

As of Monday's close, McDonald's shares are up more than 34 percent in 2017.

McDonald's year-to-date performance

Source: FactSet

Correction: This story has been updated to show McDonald's posted adjusted earnings of $1.76 per share, missing estimates.