The king of fast food is still on top of its industry. McDonald's (NYSE: MCD) overcame a slight drop in customer traffic in its core U.S. market to post healthy sales growth for its fiscal first quarter. Profits rose at an even faster pace than revenue as its refranchising initiative traded low-margin restaurant sales for high-margin franchise fees and royalties.
Let's take a closer look at the results.
Earnings per share
Data source: McDonald's financial filing.
What happened this quarter?
After slowing for the past two quarters, sales growth stabilized at a rate that implies continued market share gains and broad acceptance of the company's recent menu and pricing changes.
Image source: Getty Images.
Highlights of the period include:
- Comparable-store sales rose 5.5%, or about even with the prior quarter's gains. That result put Mickey D's well ahead of peers including Starbucks (NASDAQ: SBUX), which posted a 2% comps improvement for the quarter, and Dunkin Brands (NASDAQ: DNKN), whose comps slipped by less than 1%.
- In a shift from recent quarters, customer traffic declined slightly in the U.S. market, just as it did for both Starbucks and Dunkin Brands. However, McDonald's more than offset that headwind with higher spending per visit.
- Operating income went up 5%, which, combined with the 9% decline in reported sales, pushed profit margin up to 41.7% of sales from 35.8% a year ago. This figure continues to benefit from a shift toward a nearly full-franchised business model, with company-owned locations making up just 8% of the restaurant base compared to 15% in the prior-year period.
What management had to say
Executives sought to put the results into perspective against their long-term growth strategies. "We continued to build upon the broad-based momentum of our business," CEO Steve Easterbrook said in a press release, "marking 11 consecutive quarters of positive comparable sales and our fifth consecutive quarter of positive guest counts" on a global basis.
"We are satisfying the rising expectations customers have for the taste and quality of our food," Easterbrook continued, "and greater convenience as they visit our restaurants or enjoy meals delivered to their homes and offices."
Can McDonald's rebound continue?
The healthy sales gains suggest the burger giant's new menu options, like an updated value selection and premium sandwiches, are bringing customers into the stores while pushing average spending higher. That's good news, but investors will want to keep an eye on customer traffic in the U.S. segment in case that figure worsens and drags down the broader comps result.
For now, though, McDonald's business appears strong across its geographic sales channels. Revenue is growing at a market-beating pace, and shareholders can look forward to more profitability gains ahead as the company works toward its long-term goal of franchising 95% of its restaurant base, up from about 92% today -- and 81% at the end of 2015.
Looking further out, McDonald's is planning to spend $2.4 billion on capital improvements this year, up from $2 billion in 2017. These investments include store modernization focused on integrating digital ordering into the fast-food business. The spending will also lay the groundwork for a bigger push into home delivery, which the company sees as a huge potential growth driver over the next decade.
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Demitrios Kalogeropoulos owns shares of Dunkin' Brands Group, McDonald's, and Starbucks. The Motley Fool owns shares of and recommends Starbucks. The Motley Fool recommends Dunkin' Brands Group. The Motley Fool has a disclosure policy.