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McDonald's Rebound Gains Steam

By Demitri Kalogeropoulos - Oct 27, 2017 at 10:15AM

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After years of experimenting with competing brands, fast-food fans are returning to the industry leader.

McDonald's ( MCD 2.52% ) has found a way to turn fast food into even faster profits. The burger chain announced third-quarter earnings this week that included a 55% earnings spike as its growth rebound gained momentum.

Let's dig into the results.

Be our guest

Sales growth took a step back from the prior quarter. But that's not much of a knock against the business, considering Mickey D's in late July announced its best comparable-store sales gain in over five years. This week's 6% comps growth was just slightly below that quarter's 6.6% jump.

Four young adults sharing a meal at a fast food restaurant.

Image source: Getty Images.

The fast-food giant again posted rising customer traffic across each of its geographies, which adds weight to management's claim that the business has turned a corner. CEO Steve Easterbrook said the latest numbers "demonstrate broad-based momentum throughout our business that builds upon our strong first half of 2017."

Easterbrook has a point: Customer traffic growth ticked up to a 2.1% pace over the past nine months from a 1.8% gain over the first half of the fiscal year. Comps are up 3.3% in the U.S. market this year, or about double the rate that McDonald's achieved in 2016.

Profit spike

Most of that 55% earnings spike was due to a one-time benefit -- to the tune of $850 million -- from the sale of company-owned locations. McDonald's unloaded its China and Hong Kong businesses to franchisees, allowing it to reach its goal a full year ahead of schedule. "Our more heavily franchised structure will continue to drive shareholder value by providing a more stable revenue and income stream," Chief Financial Officer Kevin Ozan explained.

MCD Operating Margin (TTM) Chart

MCD Operating Margin (TTM) data by YCharts.

Investors could see evidence of that rising shareholder value in the results. Sure, McDonald's revenue shrank as its base of corporate-owned restaurants fell. However, the elevated proportion of high-margin franchise fees, rent, and royalties lifted profitability. Operating margin jumped to 38% of sales this year from 33% in the prior-year period.

Looking ahead

Easterbrook and his team have said that they aim to get that profitability percentage up to the mid-40s by the end of 2019. But with their refranchising initiative running ahead of plan, the company might reach that target even sooner. 

A man taking a bite out of a burger.

Image source: Getty Images.

For the rest of the year, McDonald's is likely to keep the positive momentum going through popular limited-time promotions that target both the value and premium ends of the market. Big winners in the U.S. market lately included the McPick 2 sale and the premium sandwich platform.

Longer term, management is laying the groundwork for a big push into mobile ordering and delivery. McDonald's could quickly become one of the biggest delivery companies on the market since about 75% of the population in its biggest markets live with 3 miles of one of its locations. They also hope to speed up the in-store ordering experience through tech investments including the addition of cashier kiosks.

Those moves wouldn't make much sense if the fast-food giant was shedding market share as it did in 2014 and 2015. But today McDonald's is attracting more customers, more often, across each of its sales geographies, and so its rebound is looking healthy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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