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3 Takeaways From McDonald's Earnings

By Demitri Kalogeropoulos - Jul 27, 2019 at 11:00AM

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The growth rebound in the U.S. market is finally here.

McDonald's (MCD 1.52%) business is firing on all cylinders again. The fast-food giant this week revealed that growth accelerated in its U.S. market to bring that division back in line with the impressive results the chain has been logging internationally. As a result, global sales gains shot higher, powering even faster earnings gains.

Let's take a closer look at the standout metrics from Mickey D's second-quarter report.

Growing at home

McDonald's 2018 year was a mixed bag, with comparable-store sales in the U.S. growing at less than half the pace of its booming international markets. CEO Steve Easterbrook and his team have been aiming to close that gap, mainly by pouring cash into the business, directed at store remodels and upgrades.

Friends share a fast-food meal.

Image source: Getty Images.

Investors saw the first hints of that strategy paying off in the fiscal first quarter, but gains really accelerated over the last few months. In fact, comps in the U.S. division shot up to 5.7% from 4.5% in the prior quarter and 2% over the final half of 2018. The chain didn't disclose customer traffic figures, but those gains suggest that traffic is rising again after declining by 2% in 2018. "We're becoming a better McDonald's," Easterbrook said in a press release, "by engaging our guests on their terms, whether it's through delivery, an enhanced dining experience...or through our evolving digital offerings."

Setting more profit records

The biggest profit gains have already been won from McDonald's refranchising initiative, which has brought its share of company-owned stores down to around 5% from 15% just a few years ago. Operating margin shot up to 38.8% of sales in 2017 from 32.8% in 2016. That metric set a new record of 43.1% last year.

MCD Operating Margin (TTM) Chart

MCD Operating Margin (TTM) data by YCharts

McDonald's isn't done setting new records here, though. Operating margin through the first half of 2019 is up to 43.2% from 42.9% last year despite food cost inflation and higher wages. Executives have targeted profitability somewhere in the mid-40% range over the long term, and the chain is already pushing right up to that ambitious goal.

A brighter future

The company doesn't issue annual sales goals, but the 6% comps increase over the first half of 2019 -- and the 6.5% spike in the most recent quarter -- put it in position to materially improve on last year's 4.5% global gain. The more encouraging news is that there's room for slightly faster growth ahead.

Executives have predicted that, as they upgrade more of the U.S. store base with modern appointments and introduce the latest tech to support digital ordering and home delivery, McDonald's home market should match growth in strong international areas like the U.K. and Australia. That's starting to happen, but there's still about a full percentage-point gap between these geographic segments.

McDonald's would love to see that space disappear by pushing U.S. comps above 6% over the next few quarters. That goal would have seemed completely out of reach last year when comps were stuck at 2% and customer traffic was falling. But the last six months have brought a positive shift in the chain's operating trends that's changing what investors think the fast-food titan is capable of achieving.

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