McDonald's Corp's Earnings Gorge on All-Day Breakfast

McDonald's customers have clamored for years for the chance to buy an Egg McMuffin any time of the day, and now that the restaurant is offering it, customers are lapping it up. Image source: Mike Mozart.

You can dispel any doubt whether all-day breakfast is a hit with McDonald's (MCD 0.37%) customers. The burger chain credits the menu promotion with helping drive first quarter comparable sales in the U.S. 5.4% higher, easily ahead of the 4.7% gain Wall Street was anticipating.

Although even CEO Steven Easterbrook has said the momentum the restaurant is enjoying can't be sustained, it's clear that at least for the time being McDonald's is riding the wave of enthusiasm for the deal higher.

But don't let the lower revenue numbers fool you: Currency exchange rates affected sales when they were translated back into U.S. dollars. Absent those effects, revenues actually jumped 3% year over year.

McDonald's first quarter numbers look like a business that's found its footing once again. Domestic sales were higher, international sales in its mature, high-growth, and still emerging markets were all up, as even Japan has recovered from the food quality scandals that sunk its performance over the past year.

That resulted was hinted at, however, when Yum! Brands (YUM 0.46%) reported its first quarter earnings the other day and it said its sales in China bounced back strongly. Both Yum! Brand's Chinese KFC chains and McDonald's Japanese division were hit with the same food quality scandal when a shared supplier was found to have sold them tainted meat.

Yum! Brands said systemwide sales in China's jumped 11% as same-store sales surged 6%, marking the strongest gains of any of the restaurant operator's divisions. While McDonald's had a lot of strong performances across Asia and Europe to choose from, sales in the U.K., Australia, and Canada helped push sales in its international lead segment up 5.2%. China led its high-growth segment higher as the market rose 3.6%, and its foundational markets (which is everywhere else in the world not covered by the previous two segments) jumped 11% from the year ago period.

McDonald's is going to need a bigger truck if its business recovery in Japan keeps going the way it has. The food quality scandal may soon be just a distant nightmare. Image source: Tjeerd Wiersma.

But it has to be most satisfying for McDonald's that the U.S. market looks to have come back as it has. This is the third quarter in a row the burger shop has posted higher same store sales and they're growing in strength too.

Although McDonald's also gives credit to its McPick 2 bundled meal promotion as helping sales grow, in addition to all-day breakfast promo, that seems harder to believe. While the original 2-for-$2 idea seemed a better deal than the 4-for-$4 Wendy's (WEN 1.32%) offered, or even the 4-for-$5 from Burger King, because it gave customers a choice of items rather than a no-substitutions package as did its rivals.

But it only ran the promotion for five weeks before changing it up to a seemingly more confusing 2-for-$5 bundle that, although it gave customers even more choice by adding in more menu favorites, it also appeared to charge more for less. McDonald's ran it for an even shorter period of time than the original and then gave franchisees the options of offering as many items as they wanted at whatever price point they chose. Then they scrapped it altogether in favor of its popular Monopoly game. While it's certainly possible that helped boost sales, it would seem all-day breakfast would be the biggest contributor.

And investors just might expect the comeback to improve as the year progresses. It said commodity prices are dropping more than it anticipated, and Bloomberg notes the chain is now expecting a "grocery bill" of 10 commodities to fall as much as 4.5% this year, a steeper decline than it predicted back in January.

With lower costs, higher sales, its international markets getting an equally good, if not better response, and its customers here at home believing that McDonald's has returned to its core value business, this quarter may be the start of a run up in outperformance like investors used to expect from the chain.