McDonald's (NYSE:MCD) announced impressive earnings results this month that kept the fast-food titan firmly on top of its industry, both in terms of sales growth and profitability.
How did the company deliver such stellar results?
During the earnings call, company leadership shared important details regarding the progress they've made with store redesigns, menu improvements, and an expanding bottom line. Here are the key highlights from that discussion.
To put our 5.5% comparable-store sales increase in perspective, it equates to over $1 billion of growth across the system for the quarter. Each of our operating segments contributed to this growth. -- COO Kevin Ozan
McDonald's growth significantly outpaced the broader industry, which management estimates was roughly flat in the U.S. Comparable-store sales, or sales at existing locations, rose 3% in that market compared to a 2% gain for Starbucks and a slight decline at Dunkin' Brands.
McDonald's growth was powered by menu price increases and high demand for new premium products. Check averages also rose as customers added to orders from the refreshed value menu.
One of our challenges in the U.S. is consistently growing comparable guest counts, especially when overall industry traffic is negative. U.S. guest counts declined in the first quarter due to the very competitive breakfast day part and our conscious decision to simplify our value platform, eliminating most local value offers. -- Ozan
Like Starbucks, which posted flat traffic, and Dunkin' Brands, whose traffic level declined this past quarter, McDonald's guest counts slipped in the U.S. division. That's not much of a surprise as each of these companies has targeted breakfast hours as a key growth avenue.
Profits are rising
We're beginning to see the benefits of our more heavily franchised business model in our operating margin, as it grew from around 36% in the first quarter last year to nearly 42% this year. -- Ozan
McDonald's has been aggressive at transitioning to an almost 100% franchised business model. While its proportion of company-owned locations sat at 19% in 2015, that number fell to 15% in the year-ago period and reached 8% in the first quarter. As a result of trading those lower-margin food sales for higher-margin franchise fees and rent, profitability hit a new high of over 40% of sales.
That figure should climb a bit higher, too, as the chain lowers its ownership to its long-term target of 5%.
We are reclaiming leadership and serving great-tasting burgers through product innovation and elevating our core offerings. -- CEO Steve Easterbrook
After recent success at marketing its iconic burgers and breakfast sandwiches, in addition to new premium offerings, McDonald's is pushing ahead with strategies that lean on a mix of both menu staples.
Its new fresh beef quarter-pounder rolls out nationally this quarter, and executives are putting final touches on a global celebration of the Big Mac, which turns 50 years old this year. These events should join with other popular promotions like all-day breakfast and premium burgers and sandwiches, to protect the positive sales momentum.
Expect volatility ahead
Since the start of the year, the [U.S.] market has modernized and improved hospitality in nearly 1,000 restaurants, setting the pace to bring [these upgrades] to an additional 1,000 restaurants every quarter this year. This is an aggressive pace. 1,000 projects would be like modernizing every McDonald's restaurant in Australia, and we're doing that each and every quarter in the U.S. -- Easterbrook
Mickey D's is on its way to spending $2.4 billion on its restaurants this year, up from about $2 billion in 2017. These investments are bringing more modern designs, technology like digital ordering kiosks, and improvements to the eat-in, take-out, drive-thru, and delivery service models.
Together, they constitute massive changes that are being introduced at a rate that's bound to create some bumps along the way. "We're asking a lot of everybody in the McDonald's system," Easterbrook said. But he explained, "this is what it takes to keep pace with today's rising customer expectations."