McDonald's (MCD -0.17%) is a key beneficiary of rising demand in the global fast-food industry today. The burger titan has made some of its own luck, too, by adjusting its menu, supply chain, and real estate portfolio in recent years.
This week, the restaurant stock announced third-quarter results that showed that these changes kept it near the top of the industry on key metrics like sales growth and profitability. Yet the report also points to a few major challenges to its global growth rebound plan.
Let's dive right in.
Image source: Getty Images.
A tale of two markets
Third-quarter comparable-store sales, or comps, rose 5.9% to mark just a slight deceleration from last quarter's 6.5% increase. The big-picture trends were positive, and that's where CEO Steve Easterbrook chose to focus in his comments describing the quarter. "Our performance was strong, and broad-based momentum continued with our 17th consecutive quarter of global comps growth," he told investors.
Looking deeper into the growth figures reveals a contrast between Mickey D's domestic and international markets. Outside the U.S., sales growth was robust at nearly 6% in developed areas like France and the U.K and over 8% for developing markets like China. Customer traffic increased across these divisions, too.
But the U.S. segment posted modest guest count declines, with comps gains coming entirely from rising prices and higher average spending. Customer traffic has been trending lower for well over a year now, and that pressure pushed comps growth to below 6% for the quarter.
That result is better than most rivals can claim. Domino's (DPZ 1.22%), for example, just announced a 2.4% comps increase. Yet McDonald's has been suggesting that its aggressive growth investments will close the gap between the international and U.S. markets, and so far that hasn't happened.
Finances and outlook
The financial picture is decidedly positive, with expenses holding steady even as global sales improve. But there was something for investors to be concerned about in this area, too.
Operating margin clocked in at 43% of sales over the past nine months compared to the same result a year ago. While that's far and away the best profitability in the industry, its stability confirms that McDonald's has now squeezed all of the earnings boost it can from its three-year refranchising program that brought its share of corporate-owned locations down to around 5% from 15% back in 2016.
Thanks to booming international gains, McDonald's is in a better position than Domino's, which recently lowered its global growth outlook. Yet stubborn traffic losses in the U.S. suggest that the chain is also being hurt by the flood of third-party aggregators offering deeply discounted delivery for fast food.
Market leaders like McDonald's and Domino's are strong enough to sail through this period of unsustainably low-priced competition, even if it slows growth or pinches profitability as rivals fight to build scale in home delivery. McDonald's is betting that its investments will make it one of the world's biggest delivery giants after it introduces the offering to all of its locations and markets it aggressively. It just might take some time to establish that foothold, given all the intense interest in this niche.
