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

By Annie Gasparro Features Dow Jones Newswires

McDonald's Corp.'s pivot to cost-conscious customers is gaining traction.

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The burger and fast-food restaurant chain said that sales in restaurants opened at least 13 months surpassed expectations in the latest quarter, rising 6% globally. That was largely fueled by higher customer visits in the U.S., driven by low prices on beverages and its value menu offerings, McDonald's said on Tuesday.

"We are serving more customers, more often," said McDonald's President and Chief Executive Officer Steve Easterbrook.

McDonald's began revamping its value menu in the U.S. a couple of years ago, 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 promotion to pick two items for $5 helped draw in more customers.

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.

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McDonald's per-share profit rose 9% on a comparable basis, excluding certain one-time items. Its shares were up about 1% in Tuesday morning trading. Over the past year, McDonald's shares had risen 44% through Monday's market close.

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 sold its locations in China and Hong Kong to franchisees, reaching its target to refranchise 4,000 restaurants.

"McDonald's ability to consistently grow earnings despite a generally volatile environment" makes this quarter the 10th consecutive period that the chain met or beat analysts' expectations, said Will Slabaugh of investment bank Stephens Inc.

McDonald's is also adding self-order kiosks, delivery, mobile ordering and payment, and remodeling restaurants, in an effort to set itself up for long-term growth.

McDonald's has been testing delivery in the U.S. with UberEATS since January, and in July expanded delivery to 13 countries, including 3,500 restaurants in the U.S. The chain, which offered delivery in Asia and the Middle East for many years, said it remains a clear opportunity for sales growth given that 75% of the population in its biggest global markets live less than 3 miles from a McDonald's.

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

(END) Dow Jones Newswires

October 24, 2017 10:03 ET (14:03 GMT)