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McDonald’s stock soars on better-than-expected sales

The company’s stock rose 5% Monday even though traffic fell in the first quarter.

McDonald’s same-store sales rose 2.9% in the U.S. in the first quarter ended March 31, the company said on Monday, alleviating investor concerns about weak sales and sending the stock up more than 5%.

But executives also acknowledged that customer count declined in the period, as the company’s new value menu didn’t pull in more traffic and the chain faced intensifying competition for its important breakfast daypart.

“Overall, we’re not satisfied with guest counts,” CEO Steve Easterbrook said on the company’s earnings call Monday.

But, he said, “We feel pretty good we battled through a tough quarter” from a competitive standpoint.

McDonald’s same-store sales results in the U.S. were the chain’s lowest since the first quarter a year ago. But, on a two-year basis, the chain’s performance actually improved. Two-year, cumulative same-store sales were up 4.64%, according to Restaurant Business calculations. That was up from a 3.14% two-year performance in the fourth quarter of last year.

The company had hoped that a new value menu would bring in more customers. Instead, the $1 $2 $3 Dollar Menu increased average check, which, along with higher prices, led to the higher same-store sales but did not generate higher guest counts.

“Some will create a meal using the items from the menu,” CFO Kevin Ozan said on the earnings call. “Some will buy a combo meal from off the menu and then add an item from the menu. The items per transaction is higher than our average when people don’t use the $1 $2 $3 Dollar Menu. That is helping drive average check.”

The company said it is happy with the construction of the menu but could look at marketing to generate more traffic. “We’ll keep finessing it,” Easterbrook said. “We do want to get the guest count piece moving again.”

Executives also said that breakfast traffic was down during the quarter, a rarity for a chain that has seen steady growth in the morning for years, even during the chain’s most difficult periods.

Breakfast is increasingly competitive, with companies such as Taco Bell adding the daypart, while competitors such as Burger King offer discounts to lure morning traffic. “The reality is, [traffic] is down,” Easterbrook said. “I’m not sitting here and saying share is going to a particular competitor. It’s a market share fight, and we’re going to continue to sharpen our plans.”

The weakness during breakfast did lead the company to make an uncharacteristically fast move to offer a discount aimed at generating traffic. In mid-March, the company started offering a two-for-$4 breakfast sandwich deal that executives say is a sign of the improved efficiency of the McDonald’s system.

“It’s an example of how nimble the U.S. system now is,” Easterbrook said. “We could see where the market was going, that breakfast was more competitive. The company and our owner-operators created the two-for-$4 breakfast deal. That made a more competitive breakfast.”

Executives also said they were confident they have plans in place to bolster sales in the coming months.

One of those efforts is Experience of the Future, the self-order-kiosk-enabled remodel that aims to improve kitchen efficiency and drive more restaurant sales. Executives believe those kiosks will increase in-restaurant sales as consumers order more food and dine inside out of curiosity.

McDonald’s and its franchisees have modernized 1,000 domestic restaurants, and are modernizing 1,000 restaurants every quarter this year, Easterbrook said on Monday.

That’s equal to modernizing every McDonald’s restaurant in Australia every three months.

The company is accelerating those remodels using savings from tax reform.

He called the move “aggressive, and “one of the most significant transformations in our history.”

Another is fresh-beef Quarter Pounder burgers, made to order. McDonald’s is rolling that strategy out nationwide next week, after adding it to more markets this year.

Easterbrook said that 90% of customers who try the burger say they would order it again. And Ozan noted that sales of quarter-pound burgers increase when the chain adds the fresh beef to a market.

“Even burgers not using fresh beef saw an increase during the pilot test phase,” Ozan said.

Two other initiatives at McDonald’s includes delivery, which the chain has added around the country through Uber Eats, and mobile ordering.

Delivery was a “meaningful contributor to sales” in many markets, executives said. And the company is working with its delivery companies to improve awareness and drive more orders.

Mobile order and pay has not been as strong. “Adoption has been pretty low,” Easterbrook said. He said the company “still has some things we’re trying to improve from a user experience, and to get the technology more reliable.” But the company said that curbside service, which it added at its locations last year, was “the most favored benefit.”

McDonald’s net income in the quarter rose 13% to $1.4 billion, or $1.72 per share, from $1.2 billion, or $1.47. That bested Wall Street expectations.

Investors' enthusiasm for the stock on Monday sent it to its best single day of trading in a year. And it offset what had been a tough year so far for the stock: Going into the day, McDonald’s stock was down more than 9%.  

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