Shares of McDonald's (MCD - Free McDonald's Stock Report) rose to an all-time high after the restaurant operator reported better-than-expected first-quarter results. We expected stiff competition and tough comparisons to keep things in check during the March period, especially in the United States, but management was able to pull the right levers to keep comparable-store sales positive in all regions. On our shores, the year-earlier period benefited from the launch of All Day Breakfast (that quarter also had an extra day of sales due to leap year), so we expected comps here to be negative. However, the metric rose 1.7% in the United States, as leadership's ongoing initiatives to enhance the chain's menu, convenience, and value drove sales. To wit, All Day Breakfast was expanded to include more items, and beverage and Big Mac value promotions were launched.
Looking further afield, the International Lead segment notched a 2.8% comp gain. Momentum in the United Kingdom kept going and All Day Breakfast was launched in Canada. In the High Growth segment, same-store sales were up 3.8%. While results were positive across the entire geography, management cited China as a standout. Finally, Foundational Markets posted the best comps, which rose 10.7%, primarily due to recovery in Japan. Adding it all up, global same-store sales rose 4.0%.
Looking at the quarter in its entirety, the top line fell 4% from a year earlier, to $5.676 billion. However, the decline was mainly due to refranchisings, and the figure topped our $5.575 billion forecast. In terms of profitability, refranchisings helped margins to expand, as did efforts to trim SG&A expenses (which fell 61 basis points as a function of the top line). Lower depreciation expenses (primarily in China and Hong Kong) also helped. All told, total operating costs and expenses as a percentage of revenues were down more than 5.5 percentage points on a year-over-year basis. Stock repurchases also gave a boost to earnings per share, which jumped nearly 20%, to $1.47, well ahead of our $1.33 call.
Looking ahead, we think that the company will continue to grow earnings at a brisk pace this year. The first quarter certainly proved that leadership's strategy is gaining traction. Its focus is on retaining existing customers, bringing back lost customers, and converting sporadic visitors into regulars. Investments in technology (such as kiosk and mobile ordering/payment) are geared toward speeding service, increasing convenience, and generally elevating the consumer experience. Restaurant remodels and delivery options serve the same purpose. Meantime, cost-cutting initiatives and refranchisings ought to increase profitability.
Clearly these shares are not cheap, but they are high quality and offer an attractive dividend yield. Value investors will probably be inclined to wait for a pull back before building positions, but those with a conservative bent looking for a blue-chip equity with a nice level of current income may find MCD stock attractive.
About The Company: McDonald's is a quick service restaurant with over 36,000 locations in more than 100 countries (as of March 31, 2017). The majority of the restaurants (roughly 85%) are operated by franchisees or affiliates. The company is best known for its hamburgers and French fries, but it now has a diverse menu that includes breakfast items and an array of coffee-based drinks.
