“Better McDonald’s” Beats Expectations Delivers Strong Comp Growth For Q1 2017

McDonald’s (NYSE:MCD) reported its Q1 2017 results on April 25^th 2017 and the company surprised analysts by reporting better than expected revenues and earnings per share. The biggest element of surprise was in the domestic store sales which grew by 1.7% in this quarter compared to an expected decline of 0.8%. The company’s efforts to make its restaurant experience more personalized through its digital initiatives, focus on convenience, and food quality have been the key driving factors for growth in comparable sales in this quarter. A strong performance in Japan and benefits of expansion of its All Day Breakfast initiative in the U.S. resulted in stronger comps and a lower than expected revenue decline. Below is a summary of McDonald’s financial performance:

McDonald’s revenues are witnessing a declining trend as the company refranchises its restaurants, replacing company operated sales with franchisee revenues in the form of rents and royalties. Going forward, we are likely to see this trend sustaining as the company works towards its goal of being 95% franchised by 2018. Below is a summary of the company’s franchised and company operated revenues:

While McDonald’s is taking several steps to drive revenues especially moving towards healthier menu items, the overall weakness in the restaurant industry is likely to impact its revenue growth negatively.

Better than expected comparable sales have been a highlight of this quarter. U.S. reported strong positive comps as the company expanded its All Day Breakfast initiative and executed its strategy of innovative menu, value, and convenience to customers. Beverage value promotions and Big Mac were the two key driving factors for these positive comps. Japan has been another bright spot for the company in Q1 2017. As performance in this region improves, the company is no longer planning to sell its stake in its Japan unit. Below is a region-wise summary of McDonald’s comparable sales:

Another  highlight of this quarter is a nearly 14% increase in operating income which is primarily due the company’s savings in general administrative expenses due to the refranchising initiative and higher franchised margin dollars. A gain from a strategic sale of a restaurant property also accounted for higher operating income in this quarter. As the company moves towards a predominantly franchised model, an increase in margins, but decline in revenues, is likely to be seen.

Going forward, McDonald’s  is prioritizing on its velocity accelerators to drive growth. The three key growth drivers defined by the company under its Velocity Growth Plan include digital, delivery, and Experience Of The Future (EOTF). This plan is aimed towards retaining existing customers, regaining lapsed customers, and converting casual customers into committed customers. The company is working aggressively to improve its food quality as it launches premium burgers and is likely to launch its Signature Crafted platform in the U.S. next week.

The company’s convenience initiatives include building a personalized experience and better convenience by increasing access to McDonald’s. In the U.K.  more than 650 restaurants are open 24 hours a day, seven days a week, to provide greater access and convenience to the customers.

McDonald’s is expanding its delivery initiative to more cities in the U.S. in the coming months. While this initiative is still at a preliminary state the company’s association with Uber EATS is proving to be a key driver for the expansion of its delivery service.

The company’s Q1 2017 results indicate that its initiatives towards better service and high quality food products are showing results, which is visible from strong comps in the U.S. The move towards 95% franchised restaurants is resulting in a higher operating income which along with the share buy back program is resulting in a higher EPS (earnings per share).

For more details on the company refer to our complete analysis of McDonald’s.

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