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Bacon, Donut Sticks, and Delivery Drive a Solid Quarter for McDonald's

By Jeremy Bowman – Apr 30, 2019 at 2:39PM

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Comparable sales for the fast-food giant surged globally for the 15th straight quarter.

Bacon makes it better.

That was the message from McDonald's (MCD 0.63%) as bacon, donut sticks, delivery, and a tech acquisition all drove growth for the fast-food giant in the first quarter. 

The world's biggest fast-food chain said Tuesday morning that global comparable sales in its first quarter jumped 5.4%, with gains in all its segments, including a 4.5% increase in the U.S.

"We started the year strong with our 15th consecutive quarter of positive global comparable sales," CEO Steve Easterbrook said in a statement. "[This reflects] continued broad-based momentum across each of our global segments."

Growth in its domestic market was boosted by special promotions like the Bacon Event, which included adding bacon to products such as a Big Mac, Quarter Pounder, and Cheesy Fries; the 2 for $5 Mix and Match Deal; and Donut Sticks, a popular breakfast treat that CFO Kevin Ozan said "resonated with customers."

A remodeled McDonald's restaurant

Image source: McDonald's.

Despite the strong comparable sales growth, overall revenue fell 3.6% to $4.96 billion but rose 2% in constant currency as McDonald's continues to refranchise company-owned restaurants. That figure beat estimates of $4.93 billion.  

Operating income fell 2% in the quarter to $2.09 billion, but rose 3% in constant currency, as gains from the sales of restaurants were lower, offsetting the comparable sales increase. Adjusted earnings per share were down from $1.79 to $1.78, but beat estimates of $1.76. Currency headwinds lowered EPS by $0.09.

Focusing on delivery and tech

In March, McDonald's said it would acquire Dynamic Yield, a personalization and decision logic company. McDonald's plans to use the technology to customize drive-thru menus based on factors like weather, time of day, restaurant traffic, and trending menu items. The technology can also suggest additional items to customers as they order. McDonald's plans to integrate the technology into in-store kiosks and its mobile app.

Delivery, meanwhile, seems to have hit a tipping point. The company said delivery is now a $3 billion business and that it's driving incremental sales, rather than cannibalizing in-store orders. Management has been negotiating with Uber Eats, its delivery partner, to make sure that delivery can bring incremental profits to franchisees. 

The company has also made significant progress in its Experience of the Future, an initiative to modernize U.S. stores, and has now revamped about 8,000 locations, or 60% of its U.S. base. Easterbrook said that the plan had crossed a key threshold as a majority of customers will now find a modernized McDonald's when they visit the chain, which gives the brand a lift and has improved customer experience scores.

Putting it all together 

Though global guest counts rose, U.S. guest traffic continued to fall by about 2%. However, higher prices, along with growth in delivery, where orders tend to be 1.5 to 2 times larger, and kiosk use, which also drives larger tickets, helped comparable sales.

Overall, McDonald's is taking steps to evolve its business both inside its restaurants and out. Limited-time offers like bacon and donut sticks clearly paid off in the first quarter, and the Experience of the Future initiative is helping the company keep up with changing tastes and expectations in the restaurant industry. Outside the store, investments in its mobile app, delivery, and the recent acquisition of Dynamic Yield should help the company make the McDonald's experience even more convenient for its customers. 

The headline numbers in the quarter may seem underwhelming as revenue and earnings per share both fell slightly, but comparable sales growth of 5.4% globally and 4.5% in the U.S. shows McDonald's new offerings and enhancements are resonating with customers, especially at a time when many of its competitors are struggling to grow comps.

The stock was flat in mid-afternoon trading after crossing the $200 mark earlier in the day, but shares came into the report trading at all-time highs. McDonald's has trained investors to have high expectations, and the fast-food chain came through once again.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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