Personal Finance
MCD

McDonald's Talks About Its U.S. Growth Struggles

Four friends sharing a fast food meal.

McDonald's (NYSE: MCD) recently closed the books on a mixed fiscal second quarter. Sales growth was impressive in its international markets, and profitability rose. However, customer traffic fell in the key U.S. geography, which led to a slowdown in its global expansion rate.

CEO Steve Easterbrook and his executive team sought to put those results into context for investors in a conference call with Wall Street analysts . Below are a few highlights from that presentation.

Four friends sharing a fast food meal.

Image source: Getty Images.

U.S. struggles

CFO Kevin Ozan said,

An important part of our U.S. plan includes delivering a balanced mix of both higher average check and comparable guest count growth. We've seen positive benefits in average check. However, we remain intensely focused on increasing customer visits.

Sales gains ticked down to 2.6% in the U.S. division from 2.9% in the prior quarter . McDonald's estimates that this growth rate translated into modest market share expansion that was aided by customers' trading up to higher-priced items and adding on order items from its value menu. These wins pushed average spending higher to more than offset the decline in customer traffic. Management said international markets performed better by logging gains in both average spending and customer visits.

Benefits of delivery

"Delivery's becoming a meaningful contributor to our sales, and in several of our top markets, delivery now represents as much as 10% of sales in those restaurants offering delivery," reported Easterbrook.

More than 1 billion people live within 10 minutes of a McDonald's restaurant, and that fact means the company has a massive opportunity to target growth in the delivery niche. While many restaurant rivals have struggled with the logistics and profitability around this offering, management sees almost no downside to pursuing this market aggressively. It requires "virtually no additional investment," Easterbrook explained, while boosting guest count. At the same time, delivery orders are about twice the size of standard in-person orders. Those figures help explain why McDonald's has ramped up its delivery network to 13,000 restaurants - up from 7,800 a year ago.

Strong finances

Ozan said, "We've taken significant steps to capitalize on the strengths of our business model...all of which are yielding significant benefits to our operating margin as we continue to progress toward our target of mid-40s. Year-to-date, our operating margin was 42%, up from 37% last year."

McDonald's faced higher food costs that, along with rising wages, pushed expenses up during the quarter. Its aggressive refranchising initiative more than offset that decline, though, and the company also got a boost from a lower tax rate. Altogether, adjusted earnings improved 12% to $1.99 per share, and executives foresee continued modest growth in profitability as the proportion of company-owned locations drifts down toward 5% from about 7% today.

Looking ahead

"The U.S. is in the first year of executing an ambitious and holistic three-year [growth] plan. Many of the initiatives in the U.S. have been key drivers of the success in our international markets," added Easterbrook.

Management's core challenge today is to take what's working well in international markets, such as modernized restaurants, robust delivery offerings, and compelling menu items, and apply it to the slowing U.S. segment. McDonald's made progress along those goals by upgrading 1,300 domestic locations during the second quarter. To date, it has modernized one-third of the U.S. store base, and executives plan to keep that aggressive pace going for the next few quarters.

A man takes a bite of a burger.

Image source: Getty Images.

The hope is that the new, more convenient restaurant setups will begin boosting sales with help from menu improvements like its cooked-to-order quarter pounder. Investors will know the strategy is working if customer traffic levels in the U.S. start climbing back up toward the market-thumping levels McDonald's is currently enjoying in places like Canada, the U.K., and France. "We've demonstrated our ability to transfer winning ideas across our markets," Easterbrook said, "and that's another reason for continued confidence in our business."

10 stocks we like better than McDonald's

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and McDonald's wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of June 4, 2018

Demitrios Kalogeropoulos owns shares of McDonald's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

MCD

Other Topics

Stocks

Latest Personal Finance Videos

    #TradeTalks: A Holistic Financial Picture to Give a True Indicator of your Financial Health

    Harvest Founder Nami Baral joins Jill Malandrino on Nasdaq #TradeTalks to discuss the Harvest PRO Index, holistic financial picture to give a true indicator of your financial health, not just a credit score.

    Oct 9, 2020

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More