McDonald's Net Tops Expectations; Sales Gains Cool -- WSJ

By Julie Jargon 

McDonald's Corp.'s third quarter sales growth topped analysts' expectations, but the burger giant's gains in the U.S. market cooled further, fanning speculation that big menu changes lie ahead.

A two-for-$5 menu and Chicken McNuggets made without preservatives helped boost U.S. sales. But some analysts predict same-store sales will turn negative in the fourth quarter when they will be compared with the figures rung up during the all-day breakfast introduction last year, which fueled sales for much of the year.

Chief Executive Steve Easterbrook on Friday defended McDonald's plans to keep sales up. "As to what's to be excited about going forward, there's plenty," he said.

He suggested beverage deals promoted in some regions could be made national, and said the company is developing technology to make it easier for customers to order food. He also said new products are being tested in some markets.

"We enter this period with our eyes wide open," Mr. Easterbrook said. "We're not sitting on our hands."

Its shares gained 3% to $113.93 at 4 p.m. in New York trading on Friday.

McDonald's has added more items to its all-day breakfast menu and is testing Happy Meal breakfasts in some markets. Executives haven't said whether they plan to expand the fresh beef they are testing in Dallas in an effort to make tastier, hotter burgers.

Mr. Easterbrook said operational changes that aren't as visible to investors, such as more consistent and friendly service, have led to increased customer satisfaction scores.

RBC Capital Markets analyst David Palmer said the two-for-$5 menu has increased the average price of meals rather than generating more customer visits. McDonald's, he said, needs more innovation, technology and food quality upgrades to attract more customers.

Global same-store sales rose 3.5% in the quarter, driven by growth in some of its strongest foreign markets, including Japan and Brazil. In the U.S., same-store sales increased 1.3%, in line with expectations. In the fourth quarter of last year, the first reporting period that reflected all-day breakfast service, U.S. same-store sales rose 5.7%.

Mr. Easterbrook said McDonald's is making changes that will accelerate long-term growth. That includes shaking up management. Five high-level executives have recently left or announced plans to retire, including the head of the company's U.S. business, who is being replaced by an executive from Kraft Foods Group Inc.

Mr. Easterbrook said he is trying to balance the need to retain seasoned McDonald's veterans with the need to "bring in innovative thinking."

McDonald's reported a profit of $1.28 billion, down from $1.31 billion a year earlier. Per-share earnings rose a dime to $1.50, boosted by a lower share count but hurt by a restructuring charge of 12 cents and currency headwinds of 3 cents. Analysts had projected $1.48 in per-share earnings.

Revenue slipped 2.9% to $6.42 billion, due to the company selling more restaurants to franchisees. Analysts had expected revenue of $6.28 billion.

--Anne Steele contributed to this article.

Write to Julie Jargon at [e-mail]

(END) Dow Jones Newswires

October 22, 2016 02:48 ET (06:48 GMT)

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