Remodels push McDonald’s sales higher

The company’s 5.7% U.S. same-store sales growth was its highest since 2015 as the company’s strategies bear fruit. But guest counts are still falling.
Photograph courtesy of McDonald's Corp.

McDonald’s U.S. same-store sales rose 5.7% in the second quarter ended June 30, the company said Friday, as remodels and a shift in value strategy helped the company to its best domestic performance in nearly four years.

The performance was even stronger globally, as same-store sales rose 6.5% worldwide, driven by strong results in all of the chain’s major markets.

That was the Chicago-based burger giant’s best sales performance in seven years.  

Same-store sales have risen 16 straight quarters.“We knew we had to evolve with our changing market and consumer dynamics, and we knew incremental progress wasn’t going to cut it,” CEO Steve Easterbrook said on the company’s second quarter earnings call Tuesday.

“Four years in, we did the hard work to put the Velocity Growth Plan and accelerators firmly in place, and we are energized by the broad-based strength of our results.”

Globally, McDonald’s grew guest counts as existing locations attracted new customers. But the company continued to lose visits in the U.S. in the second quarter—despite accelerating sales and a host of new initiatives.

Guest counts were down about 2% in the first quarter. CFO Kevin Ozan said on the earnings call that “there wasn’t a meaningful change in the underlying guest count trend” but it was “less negative” thanks to some promotions and a calendar shift.

“U.S. guest counts will continue to be … a street fight, just because it’s a very competitive environment in the U.S.,” Ozan said.

The biggest challenge remains in the morning, where the company has struggled to regain customer frequency over the past 18 months—though executives did note that the chain had “solid” same-store sales in the period thanks to promotions such as Donut Sticks.

Ozan said at least part of the problem is competition in the morning. “There are not many players growing comp guest counts at breakfast or really in most of the dayparts,” Ozan said. “But new entrants have kind of caused a scattering of the existing guest counts, just more units.”

Still, McDonald’s has repeatedly proven recently that it can get customers to come in and order more premium items and add more products to their orders. Only about a third of the company’s same-store sales has come from higher prices. The rest is coming from those larger and more expensive orders.

McDonald’s has been aggressively remodeling restaurants in the U.S. under its kiosk-led “Experience of the Future” design.

Kiosks tend to encourage people to order more items at a time.

In addition, delivery orders are twice as large as a typical McDonald’s order. The chain has delivery in more than 9,000 of its nearly 14,000 U.S. locations through Uber Eats. Executives said on the call that franchisees are rapidly adding DoorDash to its roster of delivery providers and that about 9,000 restaurants should have that service available by the end of next month.

Quarter Pounders made to order using fresh beef have also convinced more customers to order the burgers. The company said it has sold 55 million more quarter-pound burgers in the first half of this year than it did in the same period a year ago, before it made that shift.

All of that is improving profitability. Margins for company-operated restaurants increased by 40 basis points to 16.3%. That was the first such margin improvement in five quarters.

Franchisees’ cash flow, meanwhile, has increased for eight straight months. By May, higher cash flow had already eclipsed last year’s decline in cash flow—a decline that prompted operators to form an independent franchisee association.

Ozan said that “more stability in the restaurants” is helping drive labor efficiency, while the higher sales are improving profitability.

“If you look at all the things we threw at restaurants in 2018, including [Experience of the Future], a lot of projects, fresh beef, the restructuring we did in the field, all those changes impacted the restaurants,” he said. “We’ve kind of stabilized the business a little bit. The restaurants are now able to focus on running the restaurants as efficiently as possible.”

McDonald’s stock rose slightly through early afternoon. The stock going into Friday was up 22% on the year.

Revenues at the company were flat in the quarter at $5.3 billion. Net income rose 1% to $1.5 billion, or $1.97 per share.

Though the company has been able to generate stronger sales, it actually operates fewer restaurants in the U.S.

Domestic unit count is down by 86 restaurants over the past year. McDonald’s now has 13,886 locations in its home country. Globally, however, unit count is up by more than 700, and it now has 38,108 restaurants worldwide.

UPDATE: This story has been updated to include information from the second quarter earnings call. 

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