McDonald’s reports strong earnings, helped by all-day breakfast

By Stephanie Strom, New York Times News Service

Monday, Jan. 25, 2016 | 7:15 p.m.

McDonald’s surprised even the most bullish investors Monday, reporting stronger-than-expected quarterly gains in earnings thanks largely to serving items from its breakfast menu all day.

Same-store sales, the numbers for stores open at least a year, rose 5.7 percent in the United States in the quarter that ended Dec. 31, and 5 percent on a global basis. It was the strongest gain in such sales in almost four years.

“We begin 2016 in a much better place than we were 12 months ago,” Steve Easterbrook, chief executive of McDonald’s, said during a conference call with investment analysts.

McDonald’s has been in a turnaround that Easterbrook started when he became chief executive last March. The company changed its structure to try to encourage the exchange of ideas around the globe, and it announced it would sell off some 3,500 of its company-owned stores. Such steps are expected to reduce its costs by $300 million by 2018.

Profit in the fourth quarter climbed a healthy 10 percent to $1.2 billion, or $1.31 a share, from $1.1 billion, or $1.13 a share, in the same quarter in 2014. The company also benefited from raising its prices and cutting costs, as well as unseasonably warm weather at the end of last year.

The effect of higher wages that the company is paying employees in the stores it operates were offset by lower commodity prices, said Kevin Ozan, chief financial officer.

Customer traffic in the United States, the company’s biggest market, continued to decline, however. “Guest counts” dropped 3 percent last year, after falling 4.1 percent the year before. “We need to do more to increase loyalty in our existing customers and win back customers,” Easterbrook said.

McDonald’s shares were more than 2 percent higher in early trading on Monday.

Mark Kalinowski, an investment analyst at Nomura, said offering some items from McDonald’s breakfast menu all day and night was the biggest driver of the company’s sales at the end of the year.

“Clearly, all-day breakfast is helping bring back lapsed customers and may even be bringing in new customers who wouldn’t normally be going to McDonald’s,” Kalinowski said in an interview before earnings were announced. “I’m hearing that from franchisees — and from friends, too.”

Easterbrook said the bump from all-day breakfast gave the company some room to work on other things, like improving food quality, developing new promotional programs and improving the experience customers have in the drive-through lanes. He said those initiatives would help the company sustain growth as the enthusiasm over the breakfast program subsided.

On the conference call Monday, analysts sought insight into how the McDonald’s app, which became available for downloading in July but wasn’t advertised until October, was affecting business. Easterbrook said that 7 million people had downloaded the app, although fewer went on to register. Those who register, sharing their information with McDonald’s, become eligible for special deals, like getting a sixth coffee free after buying five.

Easterbrook said average checks were higher among customers using the app to redeem a reward.

“We think it will be a helpful contributor to sales in 2016,” he said.

The company also introduced a new value menu, the McPick, which gives customers a choice of two items from a menu of four for $2 total. In general, franchisees dislike such promotions because they offer slim or no profits, but Easterbrook said that about one-quarter of the company’s customers were “value conscious.” He said the double cheeseburger and mozzarella sticks on the McPick menu were doing particularly well, although it was too early to draw any conclusions about the success of the promotion, which started at the end of last year.

And the company got a lot of publicity for new, more environmentally friendly and simple packaging.

For 2015, profit fell 5 percent to $4.5 billion, compared with $4.8 billion the previous year. On a constant currency basis, net income was flat for the year. Sales declined to $25.4 billion, from $27.4 billion.