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McDonald's Shares Shared the Love After an Earnings Beat

By Motley Fool Staff - May 8, 2018 at 12:17PM

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The stock popped by 5% as profits grew.

In this segment from the MarketFoolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker make a meal of McDonald's (MCD 1.71%) first-quarter report, and like the market, find it quite tasty. Same-store sales were up -- both U.S. comps and international -- and the underlying reason why it speaks directly to how the fast-food giant is evolving. From pricing moves to competitive moats, the Fools consider what the company is doing best and where it still has work to do.

A full transcript follows the video.

This video was recorded on April 30, 2018.

Chris Hill: Let's move on to McDonald's. McDonald's shareholders, congratulations! You're having your best day in over a year. Shares of McDonald's up 5% after first quarter profits came in higher than expected. Their same-store sales in the U.S. were, at least in terms of that metric, the shining star of the globe, because U.S. comps were a good bit higher than international comps. I found it interesting that what was really driving that was the larger ticket price. Interesting in the sense that McDonald's really does push the value proposition of their menu. So, the fact that they were able to raise comps in the U.S. on a larger ticket order, one, is interesting, and two, good for them.

Bill Barker: Alright, well, one thing is, I'm going to possibly correct you, or at least try to get at the source of your information --

Hill: Or misinformation.

Barker: Well, I have the U.S. comps at 2.9% and global comps at 5.5%.

Hill: Oh! Then, clearly, that's misinformation, because I saw global comps up not even 1%. But, clearly I misread that.

Barker: Well, there may have been some currency translation things, or you might just be wrong.

I don't know! I'm trying to figure it out or find out whether the data that I'm looking at is wrong, which I hope is not the case. Anyway. 2.9% up in the U.S., how good is that? Well, it's definitely good. They have a lot of restaurants, and most of that is from inflation on the ticket price. They would say this is raising prices, not that they're getting more traffic, but that they successfully raised prices, and they raised prices a little bit more, but not a lot more, than inflation. Let's round 2.9% to 3%, inflation over that time period has been close to 2%. Still doing a good job raising prices.

Internationally, some parts of the world are growing 7-8% on comps. Again, I don't know if that's affected in a large chunk by the currency translation or not, but there are a lot of restaurants. They have successfully refranchised a lot. If you look at their total numbers, revenue for the company is not really going up over time. They're getting more profitable by refranchising, and they have a lower risk model that way.

Hill: I figured out my mistake. You're correct. And you know how much I hate to say those words out loud. Global same-store sales growth, 5.5%. The 0.8% number that I saw had to do with global guest counts, which enables a teaching moment, which is, when we're talking about same-store sales, there are a couple of ways to get there. One is to get more people through the door. The other is to raise prices. And, at least for this latest quarter, McDonald's is doing a little bit better job of effectively raising prices than they are at getting more people through the door.

Barker: Yes. They are doing, basically, I think, flat in terms of traffic in the U.S., and as you say, almost up 1% in terms of traffic internationally. So, that's not a lot. Still, given the number of stores that they have, 1% traffic is good, and better than a lot of the other companies in the fast-food space are doing these days.

Hill: Interesting that all-day breakfast, which was such a big driver when it was first unveiled for the first year or so, in this latest quarter, McDonald's admitted, "Yea, we're dealing with some higher competition on the breakfast front." So, that's something that presumably they will look to work on over the next year or so.

Barker: Yeah, success invites competition. Everybody is not going to just watch McDonald's succeed wildly at that and not copy them.

Hill: The exception being Chipotle. [laughs]

Barker: As we've indicated, now that there's new management, there may be some reconsideration of whether breakfast could be part of their structure. I don't understand why not.

Hill: And Brian Niccol, the new CEO at Chipotle, on the latest call, he essentially put the question of breakfast to the side. He didn't dismiss it outright, but he basically said, "There are other things we're going to focus on, and we'll revisit that sometime later." So, I would be surprised if, two years from now, we were sitting here and Chipotle, if they hadn't unveiled breakfast, they were not at least in the process of it.

Barker: I would agree that it seems to be an obvious opportunity for them. It's seemed that way for years, though, and they have their reasons, seemingly having to do with the turnover of the ingredients and the transition issues that they would have going from breakfast to lunch. I don't know, I think they're smart enough to figure that out.

But, they need to get people coming in, and that's what they're focusing on, increasing the traffic. And they do have a lot of things to solve on their plate. So, I can see not taking on breakfast as well at the moment, given new management and a decision to focus. They have opportunities in advertising there as well.

But, getting back to the competition in the all-day breakfast, who else is doing that? Nobody else, I think, has gotten the same bang for getting into that.

Hill: Not so much, but just in terms of those hours, I saw one analyst talking about Burger King making some strides in the traditional breakfast hours. As you said, when they see the success, it invites competition.

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McDonald's Corporation Stock Quote
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