McDonald's Earnings: Faster Growth and Higher Profit Margins

McDonald's (MCD +0.00%) has been signaling to investors for several quarters now that its sales growth rate will speed up as investments in the U.S. market start taking hold. But a tough selling environment kept that rebound from happening in 2018, as its home division dragged down its global expansion rate.

On Tuesday the fast-food giant finally had some good news to report about its U.S. recovery efforts. Faster gains there powered a strong start to fiscal 2019 and put the chain in position for robust earnings growth this year.

Data source: McDonald's financial filing.

What happened this quarter?

Sales growth sped up overall, mainly thanks to accelerating gains in the U.S., which appeared to show stability in the chain's key customer traffic metric. The burger giant also boosted profitability further into record territory.

Highlights of the period include: 

• Global comparable-store sales rose 5.4% after holding steady at 4% in each of the last three quarters. The standout performer this time was the U.S. segment, which sped up to a 4.5% increase from a sluggish 2% in prior periods.
• International markets continued their robust expansion rate, rising 6%. The sales decline McDonald's reported, meanwhile, was due to currency exchange shifts and the negative impact of its refranchising initiative.
• Food and labor costs inched higher, but the chain more than offset those expenses with help from the improving sales base and increasing franchise fees and royalties. Overall, operating margin ticked up to 42.3% of sales from 41.7%.

What management had to say

CEO Steve Easterbrook highlighted the consistent results McDonald's achieved around the world. "We started the year strong with our 15th consecutive quarter of positive global comparable sales," he said in a press release, "reflecting continued broad-based momentum across each of our global segments." Executives credited a few popular promotions for helping lift customer traffic in the U.S., including a "2 for $5" value deal and the introduction of new products like donut sticks.

Executives suggested that further gains could lie ahead as the company completes the third year of its three-year U.S. rebound plan. "Two years into the Velocity Growth Plan," Easterbrook explained of the 2017 plan to beef up local markets, "our sustained performance gives us confidence that our strategy is working."

Looking ahead

While it's early on in fiscal 2019, McDonald's latest performance puts it in a good position to gain market share and generate solid financial returns. The 5.4% comps increase in the first quarter makes it more likely the company will meet or exceed the 4.5% rate it achieved last year, and the chain should have no problem boosting operating margin further toward the mid-40% range that management has targeted for the long term.

McDonald's can't count on limited-time offers to sustainably keep customer traffic rising in the U.S., and that helps explain why it's spending almost $2 billion on store remodels and upgrades this year. Those improvements, which include the addition of mobile ordering and home delivery in many locations, likely played a role in this quarter's rebounding growth rate. The next few quarters will show investors whether these enhancements have finally leveled the global playing field for the fast-food giant by keeping U.S. comps on par with its fast-growing international markets.