McDonald's Stabilizes Sales, but What’s Next for the Burger Giant?

Investors had modest expectations heading into McDonald's (MCD -1.01%) third-quarter earnings report after the fast-food titan announced a significant growth slowdown in the prior sales period.

Its latest results didn't return the chain to the head-turning revenue numbers it had reported for most of 2017. However, there were some encouraging signs of a stabilizing business in the key U.S. segment.

Let's take a closer look. 

Data source: McDonald's financial filing. YOY = year over year.

What happened this quarter?

Sales growth held steady after accounting for foreign currency swings and for McDonald's refranchising initiative that's reducing revenue but lifting profitability. The fast-food giant failed to speed sales back up in the struggling U.S. segment even as the international business posted healthy growth. 

Image source: Getty Images.

Highlights of the period include: 

• Global comparable-store sales increased 4% to mark stable trends after comps gains fell from 6% in late 2017 and early 2018. The U.S. segment expanded at a modest 2.4% pace and again reported slightly lower customer traffic. International growth was stronger at between 5% and 6%.
• Reported sales fell 7% as the company sold more company-owned locations to franchisees, trading food sale revenue for more predictable, and profitable, royalty fees and rent.
• Operating income dove 20%, but only due to a one-time gain that McDonald's booked in the prior-year period. After adjusting for that change, operating income rose 4% despite the revenue drop. As a result, adjusted operating margin rose to 44% of sales from 38% a year ago.
• The company spent aggressively on modernizing restaurants, particularly in the U.S., and on adding delivery and digital ordering functionality.
• Mickey D's returned $1.7 billion to shareholders through dividends and stock buybacks.

What management had to say

In a press release, CEO Steve Easterbrook celebrated the fact that McDonald's sales rebound has now stretched into its third year, which has helped generate cash that the company can plow right back into the business. "In addition to achieving 13 consecutive quarters of positive global comparable sales," he said, "we have made substantial progress modernizing restaurants around the world, enhancing hospitality, and elevating the experience for the millions of customers we serve every day."

Looking ahead

The chain's core growth challenge today involves improving the U.S. segment so that it more closely tracks international wins in places like France and Japan. The first step on that path is achieving stability, and McDonald's made progress on that score this quarter.

Easterbrook and his team have predicted that the U.S. business will begin recovering as the company moves into its second and third years of its three-year investment initiative, which includes restaurant remodels and deeper integration with online selling and delivery. These initiatives have lifted customer traffic internationally, after all, so they should translate into gains in its home market as the upgrades filter through the system.

Investors will be watching comps figures, and especially customer traffic, in the U.S. over the next few quarters for signs that McDonald's plan is working. In the meantime, shareholders can expect profitability to continue climbing toward the mid 40% range as McDonald's whittles its proportion of company-owned locations down to its long-run goal of 5% from 7% today.