Higher Prices for Burgers Help McDonald's Sales

By Julie Jargon 

McDonald's Corp. is still struggling to attract more U.S. customers but it eked out higher sales this quarter by charging more for its food.

The company has been trying to revive traffic growth in the U.S. by upgrading restaurants, serving burgers made with fresh rather than frozen beef and offering drinks for a dollar. The chain also has been trying to make its food healthier by removing preservatives from its burgers.

However, the 2.4% growth in same-store sales in its home market, which was roughly in line with analysts' expectations, was largely driven by higher-priced menu items.

Globally, the restaurant did better, beating expectations for same-store sales growth, with a 4.2% increase, resulting in its 13th consecutive quarter of positive same-store sales growth globally.

"The strength in markets outside the U.S. is encouraging when considering broader concerns about slower economic growth," said Baird analyst David Tarantino.

Shares in McDonald's rose by nearly 6% in morning trading.

The chain's U.S. franchisees, who own roughly 95% of the country's more than 14,000 restaurants, say the only way to grow is to attract more customers into the restaurants.

But rival fast-food chains have been offering low-priced meals at breakfast, which in previous quarters have stolen share from McDonald's in the critical morning hours, which account for about 25% of the chain's U.S. sales. McDonald's is not only competing for diners with other restaurants but also with food purchased for at-home consumption.

A group of some 400 franchisees met recently to discuss forming an independent association to address concerns about profitability. The franchisees say they're worried about not seeing a return on their investment from efforts to remodel restaurants, which the company is accelerating.

McDonald's franchisees have been remodeling restaurants throughout the U.S. to be more modern. Some stores have been completely rebuilt while others have been upgraded with features such as touch-screen order kiosks, mobile order pickup areas and digital menu boards at the drive-through.

McDonald's said it expects to add 600 new restaurants this year and to have about $2.5 billion in capital expenditures for the year. Of that amount, $1.6 billion will be for the U.S., up from the $1.5 billion it had forecast in July. The company also said it expects to complete about 4,000 additional remodeling projects in the U.S. this year resulting in half of the total U.S. restaurants being upgraded by the end of the year.

Closures or disruptions due to construction have resulted in lost sales for many restaurants, according to franchisees. A report from research firm Gordon Haskett found that once restaurants completed the upgrades, customer traffic increased considerably.

McDonald's revenue fell 6.7% from the year-ago quarter to $5.37 billion due to the sale of more company-owned restaurants to franchisees. The figure beat analysts' estimates. The company has spent the past few years moving its business model toward one that is owned mostly by franchisees, which it said gives it a more stable and predictable revenue stream.

The company's third-quarter profit fell 13% to $1.64 billion. It said earnings were $2.10 a share, down from $2.32 a share a year ago. Excluding the impact of a prior year gain and restructuring and impairment charges, earnings per share increased 19%. Earnings beat analyst expectations.

--Allison Prang contributed to this article.

Write to Julie Jargon at [e-mail]

(END) Dow Jones Newswires

October 23, 2018 11:12 ET (15:12 GMT)

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