McDonald's shares fall on fears Dollar Menu could drag down growth

Key Points
  • McDonald's posted its best same-store sales growth in six years.
  • Sales were buoyed by value promotions, new menu items and expanded McDonald's delivery platform.
  • Earnings in the latest period take an 84 cents per share hit from changes in the U.S. tax law.
McDonald's crew member Samantha Medina prepares french fries in Miami, Florida.
Getty Images

McDonald's on Tuesday reported better-than-expected sales and earnings during the fourth quarter, as its value promotions and new menu items drew in more customers.

Despite the positive news, McDonald's stock fell 3.7 percent Tuesday afternoon as investors worried that the company's addition of a new $1 $2 $3 Dollar Menu may prompt more customers to trade down to cheaper menu items, and weigh on growth.

Global same-store sales grew at the fastest pace in six years, climbing 5.5 percent in the quarter. That was well-above Wall Street estimates of 4.9 percent, according to StreetAccount.

"McDonald's positive global comparable sales performance in its recent quarter and full year 2017, driven in-part by positive guest counts in all segments, is a good indicator that the company's various initiatives are continuing to take hold and resonating well with consumers," Moody's analyst Bill Fahy, told CNBC via email.

In the U.S. those efforts included a national cold beverage value promotion, which offers soft drinks for $1 and McCafe beverages for $2, the launch of delivery and the introduction of Buttermilk Crispy Tenders to its McPick 2 promotion, which allows customers to a mix-and-match two menu items for $5.

Helped by these efforts, U.S. same-store sales rose 4.5 percent, higher than the expected 4.3 percent analysts had estimated.

"We remain encouraged that McPick still has resonance, especially given the continued increase in the number of offers and deals from fast food rivals," Neil Saunders, managing director of GlobalData, told CNBC via email. "However, as much as the focus on value drives trade, it is also cannibalizing sales of higher priced menu items."

This sentiment was also raised by franchisees last week who told Nomura-Instinet analyst Mark Kalinowski that they feared McDonald's new value promotions will drive checks lower and diminish their ability to control menu prices.

McDonald's executives are already bracing for "choppy" results in 2018 and have declined to provide investors and analysts with a forecast for earnings and sales this year. Last year, the company said it wouldn't issue earnings forecasts for two years, noting that refranchising in the U.S., China and Hong Kong would make comparisons difficult.

The company has been selling off some of its company-owned stores to franchisees over the last few years to bolster the number of franchised locations. McDonald's is now 92 percent franchised, up from 81 percent three years ago.

"Over the last few quarters, I've been messaging that our 2018 results will be choppy due to refranchising of several markets in 2017 and the $100 million of depreciation benefit in China and Hong Kong in 2017 associated with the refranchising of those markets," CFO Kevin Ozan Ozan said during an earnings conference call.

In 2017, McDonald's spent $1.9 billion to refranchise 4,000 restaurants and upgrade more than 650 locations with sleek furniture, self-serve kiosks and table service. The company now has 3,000 renovated locations.

This year, McDonald's plans to spend $2.4 billion on existing locations, open 1,000 new stores and bring its total number of renovated restaurants to 4,000.

McDonald's expressed confidence it will be able to reach its long-term financial targets starting in 2019 and return $24 billion to shareholders for the three year period up until 2019.

In the quarter ended Dec. 31, McDonald's said net income fell 41 percent to $698.7 million, or 87 cents per share, from $1.19 billion, or $1.44 per share a year earlier. Earnings in the latest period took an 84 cents a share hit from changes in the U.S. tax law.

Excluding items, the Golden Arches reported earnings of $1.71 per share, which was 12 cents higher than what analysts were expecting.