McDonald's (NYSE:MCD) just took a big step in the right direction. In its fourth-quarter earnings report, the fast-food chain failed to show a return to customer traffic growth in the core U.S. market. However, that critical trend did improve year over year to help it log some of its fastest global growth in over a decade.
In a conference call with Wall Street analysts, CEO Chris Kempczinski and his team discussed that rebound and explained how the company aims to stand out in a crowded restaurant industry in 2020 and beyond. Below are a few highlights from that presentation.
Taking a victory lap
McDonald's and our franchise partners now serve nearly 70 million people in over 100 countries every 24 hours. And [restaurant-level] cash flow is at or near all-time highs in most of our largest markets. And in the U.S., it's at an all-time high.
McDonald's 6% global comparable-store sales increase capped off a strong year for the business both at home an across its international markets. Sales increased at a 10-year high overall and improved at the fastest rate in the U.S. in 13 years. Executives noted that customer traffic remained negative for a second straight year in the domestic market. However, the rate of decline lessened, giving management what they called clear evidence that the growth plan is working. "We have strong momentum in the U.S.," Kempczinski said.
Using all that cash
Over the last three years, we invested about $7 billion in the business to drive growth, we increased our dividends per share by over 30% and paid out $10 billion in dividends, and we reduced our shares outstanding about 10% by purchasing $15 billion of treasury stock.
-- CFO Kevin Ozan
By the end of fiscal 2019, McDonald's met its three-year, $25 billon cash return goal, which was supported by faster sales gains and a refranchising initiative that pushed profitability far higher, with operating margin reaching 44% of sales.
Management stressed the fact that these huge cash returns didn't get in the way of massive growth investments. McDonald's remodeled 2,000 U.S. locations in 2019, for example, to bring its total to 10,000 locations, or 70% of the selling footprint. Those capital spending priorities aren't going to change, either. "We expect our free cash flow to continue to grow," Ozan said, "and we expect to continue to return all free cash flow to shareholders through ... dividends and share repurchases."
Risks and opportunities
The uncertainties before us are no surprise to anyone on this call, whether due to geopolitical challenges, slow [fast-food industry] growth, intensifying competition, growing labor costs, or continuous technological disruption.
McDonald's reiterated that returning the U.S. market to customer traffic growth is a main priority for 2020, and its encouraged by several metrics that all point in that positive direction, including record-high diner satisfaction scores. Some of the biggest challenges it faces are competition, especially in the breakfast hours, and a delivery program that has yet to achieve the success it has in places like France and the U.K. These issues might combine with sluggish restaurant industry growth to pressure comps this year.
Still, with most metrics suggesting further financial and operating gains ahead, McDonald's likes its posture as it targets a fourth consecutive year of global traffic growth. "We head into 2020 from a position of strength," Ozan said.