Low-Price Menu Gives McDonald's a Lift -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 31, 2018).

McDonald's Corp. gained sales again by luring core customers to its cheapest meals and drinks.

The burger giant attributed U.S. sales growth in the fourth quarter to a "McPick 2" meal deal and low-price beverages, as well as to higher-priced Buttermilk Crispy Tenders. The chain introduced a new nationwide value menu this month with items priced at $1, $2 and $3, hoping consumers drawn in for cheap sodas and burgers will also order more expensive items.

The company grew guest counts by 1.9% last year, the first full year of increasing same-store traffic in five years. Same-store sales rose for the 10th consecutive quarter.

"Customers tell us that we are now simply enhancing their McDonald's experience by being more attentive to their needs and serving hotter and fresher food," Chief Executive Steve Easterbrook told investors on Tuesday.

But some franchisees worry the strategy isn't sustainable. In a recent anonymous survey conducted by Instinet, many McDonald's franchisees in the U.S. said they fear low-price items will eat into their profits, especially as commodity prices rise. One franchisee said the new menu is "good for buying guest counts" but isn't likely to be profitable. Another predicted that the new dollar menu won't last the year.

To help protect margins, the company said it has raised menu prices outside the Dollar Menu.

Mr. Easterbrook said there is more to McDonald's turnaround than cheap eats. The company has been transforming thousands of outlets into what it is calling "Experience of the Future" restaurants with self-order kiosks, table service and updated décor, including McCafe bars with new pastries.

Mr. Easterbrook said savings from the tax overhaul will help accelerate plans to bring those features to an additional 4,000 restaurants this year, bringing the total number of upgraded U.S. restaurants to approximately 7,000, half of U.S. locations. The company and its franchisees will invest $6 billion over the next two years in these and other U.S. upgrades.

McDonald's said its effective U.S. tax rate will fall to between 25% and 27%, down from its historic rate of between 31% and 33%, resulting in up to $500 million in annual savings before the investments. McDonald's said it expects to return $24 billion to shareholders in the three-year period ending in 2019.

Fourth-quarter same-store sales rose 5.5% globally and 4.5% in the U.S., its biggest market. Both figures beat estimates. While adjusted earnings also rose, revenue dropped 11% from a year ago to $5.34 billion, stemming from the sale of company-owned restaurants to franchisees.

Overall for the quarter, McDonald's reported a profit of $698.7 million, or 87 cents a share, compared with $1.19 billion, or $1.44 a share, a year ago. Excluding charges related to the new U.S. tax law, the company earned $1.71 a share, up from $1.43 in the year-earlier period. Analysts had expected adjusted earnings per share of $1.59.

The company booked a $1.2 billion tax charge related to foreign earnings, partly offset by a $500 million benefit from revaluing deferred tax assets and liabilities due to the new lower corporate tax rate.

Cara Lombardo contributed to this article

Write to Julie Jargon at julie.jargon@wsj.com

(END) Dow Jones Newswires

January 31, 2018 02:47 ET (07:47 GMT)