McDonald's Profit Rises, Refranchising Drive Dents Revenue--2nd Update

By Annie Gasparro Features Dow Jones Newswires

McDonald's Corp.'s heightened focus on low prices is helping the burger giant win back customers from rival fast-food chains.

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Sales in McDonald's restaurants opened at least 13 months rose 6% globally in the latest quarter, marking the company's ninth consecutive period of same-store sales growth. That was largely fueled by more customer visits in the U.S., driven by its low-price drinks and new value-menu options, McDonald's said Tuesday.

"We know that customers motivated primarily by value and deals come more often and spend more," McDonald's Chief Executive Steve Easterbrook said on a conference call with analysts.

McDonald's began revamping its value menu in the U.S. after realizing that it had been losing customers in recent years to rivals serving cheaper food rather than higher-end fast-casual restaurants it had been trying to emulate with healthier and upscale items.

In recent months, its $1 drinks and promotions to pick two items for $5 in certain markets helped boost sales, and McDonald's is planning to start a nationwide value menu in 2018.

Over the last several years since discontinuing the Dollar Menu, "we weren't as competitive as we needed to be on value," said Chris Kempczinski, president of McDonald's USA.

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In the U.S., McDonald's said it also benefited from the continued success of its premium, semi-customizable burgers and sandwiches, which are more expensive than a Big Mac, but cheaper than some higher-end burger chains like Five Guys. It is part of a high/low menu strategy it says it is employing to attract customers and maintain profit margins. In the latest quarter, its operating margin continued to expand.

McDonald's per-share profit rose 9% on a comparable basis, excluding certain one-time items.

Its shares were up about 1% in Tuesday trading. Over the past year, McDonald's shares had risen 44% through Monday's market close.

Restaurant analyst Will Slabaugh of investment bank Stephens Inc. noted the ability for McDonald's "to consistently grow earnings despite a generally volatile environment."

Total revenue fell about 10% to $5.75 billion in the quarter, after McDonald's sold more of its restaurants to franchisees and only collected a percentage of the sales from them, the company said. During the quarter, McDonald's, which has 37,000 restaurants globally, sold its locations in China and Hong Kong to franchisees, reaching its target to refranchise 4,000 restaurants.

McDonald's is starting to use fresh beef for some burgers, upgrading its McCafe coffee and snacks, and adding self-order kiosks. It is also offering delivery at thousands of locations, introducing mobile ordering and payment, and remodeling restaurants.

The improvements require upfront investments and will increase labor costs as they retrain employees.

McDonald's executives said its margins will take a hit for the next six to 12 months, but these changes will pay off in the long run.

Delivery, for instance, has generated incremental orders from customers, the company said. McDonald's has been testing delivery in the U.S. with UberEATS since January, and it will have it available in 5,000 U.S. restaurants, and a total of 10,000 locations globally, by the end of the year. "We are just beginning to scratch the surface on this opportunity, " Mr. Kempczinski said.

Write to Annie Gasparro at annie.gasparro@wsj.com

(END) Dow Jones Newswires

October 24, 2017 14:14 ET (18:14 GMT)