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McDonald’s stock surges on strong earnings

The company’s revenue and profit growth impressed investors, and its stock rose 6%.
Photograph courtesy of McDonald's Corp.

McDonald’s stock rose as much as 6% on an otherwise brutal day on Wall Street on Tuesday after reporting stronger-than-expected revenue and earnings growth.

The growth helped the company’s stock recover after an otherwise lackluster year: The stock had been down nearly 4% going into trading on Tuesday and is now up for 2018.

Revenues at the company declined 7% in the quarter ended Sept. 30, to $5.4 billion from $5.8 billion, while net income declined 13% to $1.6 billion, or $2.10 per share. But both numbers were better than Wall Street analysts expected.

Same-store sales rose 4.2% worldwide, including 2.4% in its key U.S. market.

Yet the company continues to navigate a challenging domestic market as it undertakes what executives call the largest construction project in the Chicago-based company’s history: remodeling its restaurants to its kiosk-centric “experience of the future” design.

The same-store sales came from customers spending more when they order, either through more items or more expensive items. But the company continued to lose customers, as it has all year.

“It’s a market share fight on traffic,” CEO Steve Easterbrook said on the company’s earnings call Tuesday morning. “There’s no tailwinds. We don’t see many people out there in the sector growing traffic. It’s a scrap. It’s a market share fight.”

The company expects to have 12,000 of its 14,000 U.S. restaurants converted into the new design by the end of 2019. “It’s the most significant transformation ever taken in the largest market in the McDonald’s system,” Easterbrook said. “Franchisees are undertaking a lot all at once.”

Executives acknowledged that the time it takes the restaurants to remodel is hurting sales more than expected, and the time it takes for sales and traffic to build to expectations has taken longer, too. “The sales and guest count recovery has also been a little inconsistent,” CFO Kevin Ozan said.

They noted that the remodels have hurt same-store sales by half a percentage point so far this year. Ozan said the company has worked to minimize the impact on sales and traffic while the restaurants are being remodeled and is also working on strong reopening plans in local communities to speed up sales and traffic recovery.

McDonald’s also has a challenge during its breakfast business, traditionally a strong daypart for the company but which has been sluggish all year.

Executives said on Tuesday that the company is shifting to more regionalization, believing that breakfast is more regional than other dayparts. McDonald’s also added $1 any-size coffee in September and a $1 Sausage McMuffin or $1 Sausage Biscuit to its $1 $2 $3 Dollar Menu.

Executives also promised new breakfast items “inspired by customers.” As it is, McDonald’s is testing French Toast McGriddles and cold-brew coffee, among other things.

Executives also promised new value through a “classic meal deal.” The company did not have any details on the new menu items to be introduced or the new value.

Despite the challenges, McDonald’s said it outperformed its primary competitors by 70 basis points in the quarter with its 2.4% increase. And executives said they are getting customers to order more when they do come in, thanks to many of its existing efforts—including kiosks, where customers take time to order, as well as delivery and the chain’s fresh beef quarter-pound burgers.

Easterbrook said that customer satisfaction with delivery through Uber Eats “remains high” and that once customers start ordering delivery they remain loyal. He said the company is integrating delivery orders into its point-of-sale system and is exploring delivery orders through the chain’s mobile app and new packaging to keep the food warmer.

McDonald’s also said that the pace of mobile app downloads doubled in the quarter and the company is getting more transactions, giving the company “deep insights” into customers’ purchasing behavior.

While the company is doing all of this, however, speed of service has slowed even as customer satisfaction has improved. “Our service times slowed down,” Easterbrook said, promising an improved focus on speed, especially in the drive-thru. “Speed is a fundamental part of our DNA.”

McDonald’s stock rose on Tuesday even though stocks as a whole were down more than 1% and most restaurant stocks fell.

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