McDonald's (NYSE: MCD) got a big boost after reporting first-quarter results that beat analysts' estimates on both the top and bottom lines, and after having its five-quarter streak of higher U.S. comparable-store sales snapped last time out, it was back again this time around with higher year-over-year numbers.
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While the fast-food chain's progress shows that CEO Steve Easterbrook's commitment to returning the burger joint to its basic value proposition is working, it also reveals there is still a long way to go. If it doesn't change this one thing, all that hard work will be for naught.
Image source: McDonald's.
A comeback on the menu
The earnings report shows the company has all the right ingredients in place to complete the repair of all that was wrong with the chain. All-day breakfast, new plays on the longtime Big Mac favorite, and its value offerings for drinks all combined to boost sales for the seventh straight quarter and helped per-share profits jump 19% on a constant currency basis.
As Easterbrook noted in his earnings conference call with analysts, "Our greatest opportunities are at the core of our business."
He reiterated that food quality, convenience, and value were the essential underpinnings of the McDonald's experience, and it has always been why customers went to the burger joint in the first place: getting a good-tasting meal and a good price. It was when McDonald's strayed from those foundations that the chain went awry, trying to be more like the fast-casual chains that are today's ailing restaurant concepts.
The good work the hamburger palace has accomplished is evident in the comparison with rival Restaurant Brands International (NYSE: QSR), whose Burger King chain reported that its own quarterly comparable sales were flat when adjusted for last year's leap day (but down 0.1% as reported). Wendy's (NASDAQ: WEN) is due to report its own results soon, and if trends hold up, it may turn negative, too -- which makes the achievement at McDonald's all the more remarkable, as its rivals have enjoyed growth over the past few years at its expense, suggesting the changes McDonald's has made are gaining traction.
Data source: Company quarterly SEC filings. Chart by author.
The challenge of getting guests to return
Yet having lost customers to the other burger chains and dining concepts, McDonald's is having trouble wooing them back. Customer traffic counts remain a problem for the company, which, although they were positive in the quarter, were much lower than a year ago, when it got the first taste of the effects of all-day breakfast. But that lasted only a short time, and by the third quarter, comps had turned negative again and it ended the year at a loss, the fourth straight year it has lost customers.
To its credit, McDonald's remains committed to growing customer counts and says it continues to be the company's top priority. It believes the changes it has made, and continues to make, will be the difference in turning those numbers positive, but it faces some big challenges.
Data source: McDonald's quarterly SEC filings. Chart by author.
As noted, McDonald's got a boost last year from the introduction of all-day breakfast, which peaked in the second quarter last year. Now it is going to be coming up against those tough-to-beat numbers in its current quarter, and without a similar motivating promotion to drive customers in, the prospects look dim. Fresh beef, cage-free eggs, and buttermilk pancakes can only take the chain so far, even if they're making for better-tasting food.
Still, the quarter indicates McDonald's can do it. By continuing to drive home its value proposition, the burger chain can deliver the growth investors seek and generate the foot traffic from its customers that it so desperately needs.
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