Restaurants

McDonald's earnings beat estimates as promotions drive sales growth

Key Points
  • McDonald's earnings beat estimates, fueled by successful promotions and its store upgrades.
  • During the first quarter, the burger chain announced tech-focused deals with Dynamic Yield and Plexure.
  • As foot traffic has fallen, the company has been simplifying its menu and turning to tech to bring customers back.
Kiosks for ordering food sit in the dining area of a McDonald's restaurant located inside the company's new corporate headquarters on June 4, 2018 in Chicago.
Scott Olson | Getty Images

Along with a string of successful promotions, technology-focused store upgrades helped McDonald's beat analysts' expectations for earnings and revenue. But the company also said Tuesday that its tech investments will mean higher expenses this year.

Shares of the company jumped as much as 3% in premarket trading but gave up those gains when the market opened. Recently, shares were up 1%. The stock, which has a market value of $151.4 billion, has gained 11% since the start of the year.

The fast food giant raised its full-year outlook for selling, general and administrative expenses because of its tech investments, including its acquisition of Dynamic Yield. The company previously said that those expenses would decline by 4% this year, excluding currency changes, but now expects them to be unchanged from last year.

McDonald's is also forecasting that U.S. commodity costs will increase by 2% to 3%, up from a previous range of 1% to 2%.

Here's what the company reported compared with what Wall Street was expecting, based on a survey of analysts by Refinitiv:

  • Earnings per share: $1.78, adjusted, vs. $1.75 expected
  • Revenue: $4.96 billion vs. $4.93 billion expected
  • Same-store sales: up 5.4% vs. 3.4% increase expected

The Chicago-based company said fiscal first-quarter net income fell to $1.33 billion from $1.38 billion a year earlier. However, profits were flat on a per-share basis at $1.72.

Excluding an additional $47 million of income tax costs, McDonald's earned $1.78 per share, beating the $1.75 per share expected by analysts surveyed by Refinitiv.

Net sales dropped 4% to $4.96 billion, topping expectations of $4.93 billion. Excluding currency fluctuations, revenue increased by 2%. McDonald's refranchising initiative once again hit sales this quarter. While selling its corporate-owned stores to franchisees helps McDonald's cut costs, it also means that the company's reported revenue falls because of accounting differences.

However, its strong same-store sales performance shows that customers are still eating plenty of its Happy Meals and Big Macs. The fast food giant reported global same-store sales growth of 5.4%, beating Wall Street's estimates of 3.4%.

"We started the year strong with our 15th consecutive quarter of positive global comparable sales, reflecting continued broad-based momentum across each of our global segments," CEO Steve Easterbrook said in a statement.

In the U.S., sales at stores open at least a year increased by 4.5%. McDonald's attributed the growth to its promotions, like its hour-long free bacon giveaway, the 2 for $5 Mix and Match deal and Donut Sticks. The company also said that it is seeing a "net positive impact" from its store renovations for the first time.

"This means that the sales lifts from completed projects now exceed the downtime impacts from current projects," CFO Kevin Ozan told analysts on the conference call.

Foot traffic to stores has been falling, so the company has been investing heavily in modernizing its U.S. stores with self-serve kiosks, digital menu boards and other upgrades.

As part of its strategy to integrate more technology into the business, McDonald's announced deals with Dynamic Yield and Plexure during the first quarter. The acquisition of Dynamic Yield will help the fast food giant integrate more decision-making tech into its drive-thru menus, with the potential to add it to its app or kiosks down the line. Executives said that the company has already integrated the machine-learning technology to 700 drive thrus.

"We remain focused on optimizing execution of the plan, and our recent acquisition of Dynamic Yield further demonstrates our relentless determination to seize opportunities to unlock greater potential and position McDonald's for long-term sustainable growth," Easterbrook said in a statement Tuesday.

Meanwhile, its minority stake in the mobile app company Plexure will help it engage more with customers via its app, as well as prevent its competitors from benefiting from the company's innovation.

Its delivery business, which is now worth $3 billion, is still helping drive sales. Easterbrook told analysts that the average delivery check is 1.5 to 2 times bigger than traditional orders. 

Uber Eats, McDonald's exclusive delivery partner, takes a chunk of sales with its commission fees, although Uber said in a filing to go public that it charges its largest chain restaurant partners lower fees. Bloomberg reported that the burger chain is considering ditching its exclusive partnership with Uber Eats and reducing the fees that it forks over to the platform.

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