McDonald's (NYSE:MCD) latest earnings report didn't mark a robust turnaround in the U.S. market, but it did show that the chain is moving in that direction. Faster sales gains at home allowed Mickey D's to start fiscal 2019 with a healthy global expansion rate, and investors have a few good reasons to believe the growth could accelerate in the coming quarters.
CEO Steve Easterbrook and his team discussed some of those encouraging signs in a conference call with Wall Street analysts, and below are a few highlights from that presentation.
Turning the corner in the U.S. market
For the first time since we've begun our [experience of the future] roll out, we are seeing a benefit to our overall U.S. sales comp. Where 2018's focus was on considerable transformation and building a foundation for growth, our 2019 focus is on operation execution in our restaurants and optimizing the experience for our customers.
Sales gains sped up to over 4% in the U.S. market after staying stuck at around 2% in each of the last two quarters. That success was partly due to popular limited-time menu introductions, which are hard to rely on for consistent growth. McDonald's also struggled with lower customer traffic, extending that negative trend into its second year.
However, management said McDonald's reached an important turning point in that its ambitious renovation initiative is now contributing to growth rather than pressuring results as franchisees close temporarily for remodeling. That suggests U.S. sales gains could march closer to the 6% rate the chain is enjoying internationally as a further 1,600 locations are upgraded over the next three quarters.
Banking on delivery
Delivery has grown to a $3 billion business ... and we believe there is a lot more opportunity to grow. We now offer McDelivery in over 20,000 restaurants across more than 75 countries, which is more than half of all McDonald's restaurants. Our ability to continue expanding our delivery reach further demonstrates how our size, scale, and convenient locations close to customers gives us a tremendous advantage.
Executives highlighted recent delivery wins in the large Australian market, which has contributed to record-high customer traffic, increasing guest satisfaction, higher average spending, and a long streak of overall sales growth. These metrics give the chain confidence to scale up the service quickly, especially in the U.S. The biggest challenge there today is making fast-food fans aware of the offering, so investors should see initiatives over the next few months aimed at raising awareness through marketing and promotions.
Managing cost pressures
First-quarter pricing was up about 2%, while commodity costs for the quarter increased approximately 3%.
-- CFO Kevin Ozan
McDonald's faced two big cost pressures for the period: rising labor expenses and food input inflation. These trends hurt earnings but other wins fully offset the pinch. Specifically, executives credited higher prices and rising sales volumes for keeping restaurant-level margins steady. And the positive impact of the refranchising initiative -- which has nearly finished pushing the percentage of franchised stores to 95% of the base, from 85% just three years ago -- allowed overall operating margin to rise to 42.3% of sales and approach management's long-term goal of the mid-40% range.
These financial successes lifted cash flow, and that's important considering all the aggressive investments into the business that executives have lined up for the next few quarters. The ultimate indicator of whether that spending is working will be whether customer traffic begins improving again in the U.S. after more than a year of sluggish trends so that each of McDonald's markets is contributing to robust overall growth.