MacDonald's turnaround plan is working as earnings beat expectations

McDonald's Corp exceeded analysts' forecasts both for revenue and profits in a report on Monday as it clocked higher sales in foreign markets and in the US customers spent more at its outlets.

The stellar performance caused shares to rise more than 5 percent. Sales were strong in mature markets such as the UK and Germany. The fast food chain was the top gainer on the Dow Jones Industrial Average (DJIA) today.

Turnaround plan is working

CEO Steve Easterbrook has a multi-year turnaround plan that was launched in 2015. The plan was to refresh the restaurant's menus, add technology to stores, and make the outlets more welcoming. It seems to be working. McDonald’s solid showing marked the 11th consecutive quarter of positive comparable sales and fifth straight of positive guest counts.

Change include adding items such as high-margin gourmet burgers to the menu. The burgers use more expensive and fresher ingredients and cost six to seven dollars. At the lower end, $1 to $3 dollar value options were also added.

Some operators worried that the added value items would actually lower the average check but this did not happen. Often those ordering from the value menu ordered more items. Guests were also found to be ordering premium items and classics then adding the new value items as well.

US sales rose significantly

In its most profitable market the US, same-store sales rose 2.9 percent topping analysts' expectations as average check tallies went up. Tigress Financial Partner's analyst Ivan Feinseth said: “The value price menu does bring people in, but people tend to spend more ... people still want a number of key McDonald’s items like the Quarter Pounder and the Big Mac.” MacDonald's and other fast food chains have been enticing customers with the cheap options as they battle for a share of the market that is not growing.

Easterbrook said that there was an initial weak response to the one to three dollar menu leading the company to offer a 2 for $4 mix and match deal on breakfast sandwiches trying to stave off competition in the all-day breakfast category.

Customer visits actually declined in the US but rose in Japan, France, Australia and also Canada resulting in an overall traffic rise of 0.8 percent.

Global sales rise and earnings beat estimates

Global sales at stores which have been open at least 13 months rose 5.5 percent. Analysts' estimates was just an average of 3.94 percent. Peter Saleh an analyst said: “(This) shows the power of the brand ... globally the numbers were outstanding. The results were very impressive, actually more impressive than we initially had anticipated.”

Excluding certain items, McDonald's earned a profit of $1.79 per share as compared to the estimate of $1.69. However, revenue fell 9 percent.

Previously published in Digital Journal