There's no reason not to like McDonald's (MCD 2.46%) fourth-quarter earnings report. Global comparable sales rose 5% in the period while U.S. comps surged 5.7% higher, well above even the 4% increase franchisees were expecting, and marking its best quarterly performance since 2013.
The burger chain seems to have a certifiable hit on its hands with the all-day breakfast menu, and while the new McPick 2 value meal menu is still in early days, CEO Steve Easterbrook says there's reason to believe it will also be a success.
Now that it's put together back-to-back quarters of higher sales -- third-quarter comps were also up, even if just barely -- investors may be ready to declare that McDonald's is back. But while the fast-food chain may have regained its footing -- and it may have even gained back some market share from rivals like Wendy's (WEN 2.54%) and Burger King -- there remains enough doubt about it that you should hold off breaking out the bubbly.
Investors should consider these seven things before deciding the McDonald's turnaround is in full swing.
1. Where's the butter? Last quarter, Easterbrook credited McDonald's switching back to the original Egg McMuffin recipe that used butter instead of margarine as one of the main reasons sales grew, along with introducing a new buttermilk chicken sandwich. This time around, however, dairy and poultry -- except for a promotion involving its premium Chicken Legends sandwich -- was noticeably absent as a lever for lifting sales.
2. There's a buzz about breakfast. Easterbrook took pains to point out that momentum surrounding the introduction of the all-day breakfast menu grew in the fourth quarter, surpassing even internal projections of how successful it would be. Yet even the CEO had to admit that will have only a transitory impact, as the buzz generated by the offering, which is currently leading to increased ticket values, will eventually die down.
3. Currency effects remain a strong headwind. Although systemwide revenues grew 6% on a same-dollar basis, because two-thirds of McDonald's sales come from outside the U.S., the impact currency exchange rates have can't be dismissed and it's what caused reported revenues to fall 5%.
4. Operating profits were boosted by one-time items. McDonald's reported its quarterly operating income grew by 16%, or almost $128 million, but that was because it was helped along by a $135 million non-recurring gain from the sale of a unique piece of property.
5. There's a lower bar to step over. In 2014, comps were down almost 2%, reflecting falling customer counts and other "ongoing, broad-based challenges" as part of a multiyear decline. A growth in comps is certainly a bright spot, and it's been able to experience positive weekly comparable sales gaps of 2.9% over Restaurant Brand International's (QSR 2.87%) Burger King, Wendy's, and other quick-serve rivals, but it was gains off a much lower base that helped move the needle. Fourth-quarter revenues of $6.3 billion are about equal to where they were in 2010 when it posted $6.2 billion in sales.
6. No traffic cop is needed here. And traffic is still falling. Customer counts were down more than 3% over the first three quarters of 2015 with Nation's Restaurant News estimating it has lost about 8.5% of its traffic since 2012. McDonald's says growing customer traffic remains a top priority for the chain, but until that happens, McDonald's can't be seen as really improving.
7. Higher prices pushed revenue gains higher. Easterbrook noted the burger chain benefited from commodity costs falling in the period, with beef prices in particular falling 1%. Coupled with price hikes of 2% in the period, it's easy to see how its revenues are rising.
Make no mistake: McDonald's is improving, but there are a lot of non-recurring benefits it enjoyed this quarter along with factors that mask the impact of its having lost customers. All-day breakfast and a greater focus on the value end of the menu are tangible things that should serve it in good stead, far better than any use of butter could bring.
But it's still too early to say McDonald's has turned the corner, and it's going to need at least another quarter and probably a few before the all-clear signal can be given.