By Sarah Foster
McDonald’s Corp. supersized its adjusted profits and sales, exceeding expectations, for the fourth quarter ended Dec. 31, as cheap meals and promotional deals successfully lured more customers into stores.
Adjusted profits for the world’s largest fast-food chain, before a big tax charge, soared 9 percent to $1.89 billion, or $1.71 per diluted share, compared with $1.73 billion, or $1.44 per diluted share, in the year-earlier period. Wall Street analysts predicted that adjusted profits would reach $1.23 billion, or $1.59 per diluted share.
The company’s adjustment excluded a $1.2 billion tax charge associated with the new U.S. tax code’s treatment of repatriated earnings held abroad. Without the adjustment, fourth-quarter profits for the company reached $698.7 million, or 87 cents per diluted share, compared with $1.19 billion, or $1.44 per share.
“Our top priority in 2017 was serving more customers more often, and we did,” said CEO Steve Easterbrook during an earnings conference call. “This was our first full year of positive comparable guest count growth since 2012,” referring to an increase in visits to comparable restaurants, those open at least 13 months.
Total revenue reached $5.34 billion, down 11 percent from $6.03 billion a year earlier, compared with Wall Street expectations of $5.23 billion. The decline was caused by a 27 percent decrease in sales by company-operated restaurants. This drop, in turn, reflects the company’s efforts to convert about 4,000 of its company-owned stores to franchises by the end of 2017, according to Kevin Ozan, vice president and chief financial offer. Franchised restaurants report fees to the parent company, which are added to company-owned sales to produce total revenues.
“We begin 2018 ready to operate under the streamlined and more heavily-franchised business model,” Ozan said.
U.S. sales rose 4.5 percent at established locations during the fourth quarter, thanks to the success of the “McPick 2” meal promotion and the new buttermilk crispy chicken tenders. Sales rose 5.5 percent at established stores worldwide — a six-year high, according to Easterbrook. Easterbrook said the company will continue to emphasize affordability and convenience in an effort to maintain customers.
Will Slabaugh, restaurant analyst at Stephens Inc., believes this would be a key driver of traffic growth.
“We would cite the $1-$2 beverage promotions, McPick 2, and regionalized value bundling as the main traffic drivers,” Slabaugh wrote in a report to investors.
Profits for the year ended Dec. 31 rose 11 percent to $5.19 billion, or $6.37 per diluted share, compared with $4.69 billion a year ago. Revenues fell by 7 percent to $22.82 billion compared with $24.62 billion a year ago, due to the company’s efforts to franchise more global stores.
The company also commented on the outlook for 2018, in which it plans to invest $2.4 billion in its “experience of the future” platform, where stores are remodeled to possess digital menu boards, self-order kiosks, and a more modernized look, according to the company.
“We will continue to provide customers an improved experience and greater choice in how they order, pay and are served their food,” Easterbrook said.
Results for next year, however, will be more “choppy,” Ozan said.
“2018 results will be choppy due to the refranchising efforts of several markets in 2017 and the $100 million of depreciation benefit in China and Hong Kong in 2017 associated with the refranchising of those markets,” Ozan said. “We expect 2018 results to be even a little more choppy, with U.S. tax reform and a new revenue recognition accounting standard that went into effect Jan. 1.”
McDonald’s shares dropped $5.29 or 2.79 percent to $172.12.