Article

Investors are lovin’ it: McDonald’s Q2 net income up 15%

Europe, McCafe offerings boost company's results.

July 21, 2011 by Alicia Kelso — Editor, QSRWeb.com

McDonald's Corporation today announced strong results for the second quarter ended June 30, driven by growth across all areas of the world, particularly in Europe.

Highlights for the quarter include:

Global comparable sales increased 5.6 percent, with the U.S. up 4.5 percent; Europe up 5.9 percent; and Asia/Pacific, Middle East and Africa (APMEA) up 5.2 percent; Consolidated operating income increased 19 percent (11 percent in constant currencies);Diluted earnings per share of $1.35, up 19 percent; and a return of $1.4 billion to shareholders through share repurchases and dividends.

Domestic results

Domestic sales were fueled yet again by the McCafe line-up, including the new Frozen Strawberry Lemonade, as well as classic core items such as the Big Mac and Chicken McNuggets. New dipping sauces for the McNuggets were launched in early June.

In a conference call with investors Friday morning, McDonald's USA president Don Thompson said the company has captured an even greater share of the beverage segment with the Frozen Strawberry Lemonade launch, as well as the new Mango Pineapple Real Fruit Smoothie.

"Our total McCafe sales were up 29 percent over the second quarter of 2010, and we're still featuring dollar soft drinks and sweet tea," he said.

Thompson added that McDonald's will continue to focus on evolving its nutritional items, such as oatmeal and chicken sandwiches on whole grain buns, and on its store modernization initiative, which includes faster service via the drive-thru.

"We've just begun to tap the capacity opportunities with our side by side drive-thrus. There are 2,200 now in the U.S. and a growing number of handheld order takers increasing our throughput in the drive-thru," Thompson said.

McDonald's is also rolling out a new POS system which, according to Thompson, will enable a bigger focus on customer experience and will improve accuracy. The system is currently deployed in more than 10,000 units in the U.S. and will be in all domestic units by year's end.

Europe/APMEA results

Europe's comparables were up 5.9 percent driven by signature offerings, new products, a growing breakfast daypart and a continued emphasis on modernizing the restaurant experience.

"We're pulling the right levers right now to remain a compelling destination," Thompson said. "Our premium products like the McWraps are available in 17 countries across Europe and, in 11 markets, the 1955 burger is available. It is also Germany's best performing premium sandwich."

Europe leads the McDonald's system in modernization efforts, Thompson said, and contactless payment and self-service kiosks have simplified customer experiences.

APMEA's 5.2 percent increase is the result of McDonald's growth and added convenience initiatives in the region, as well as its value initiative. There are also nearly 1,700 dessert kiosks – mostly in China – that provide a quick treat for new and existing customers. Thompson said McDonald's presence in China has been boosted by the country's growth in disposable income.

Inflation and commodities

McDonald's CFO Peter Benson reiterated that food inflation rates are rising 4 to 4.5 percent, however these cost increases were offset by guest growth at the chain. Benson added that recent price increases in Chinahelp to manage rising costs in food have not proven to affect the guest count or the bottom line.

"The key to keeping the guest count movement strong is everyday value offered in a high inflation market," he said. "At the same time, with input costs rising, we have to do something to maintain profitability. In July we looked at adjusting prices, but we're not seeing impact from that in these early days."

What to expect next

McDonald's will continue to maintain a pulse on commodity prices, which aren't expected to ease within the next year. The company's priority, however, is continued reinvestment in the company.

"We had strong operating results that generated a lot of cash. Our first priority with that cash is to reinvest in the business. Half of that will be allocated to existing restaurants, and the other half to opening new units," Benson said.

McDonald's goal is to have 600 units reimaged by year's end. Thus far, 200 are completed.

The opening plan for 2011 includes 1,100 total new units, with 150 in the U.S.; 225 in Europe; 90-plus in Latin America and 650 in APMEA (450 of those in China).

Thompson said another focus is on a "strong pipeline" of new products, including more McCafe offerings. He said McDonald's still views itself as an underdog in the frozen beverage category, which positions the company well to gaining more market share.

The company is looking at a stronger chicken presence, and considers itself to be a formidable competitor in the premium burger trend found mostly in the fast casual segment.

"We have some different products in different tests around the country that we're looking to implement, particularly burger tests. Our Angus line continues to perform well. We have the McWraps in Europe that are doing well and the U.S. is looking at that, also. We have a couple of things in the dessert category, too, and then there's always the ongoing beverage innovation," he said. "We'll manage everything appropriately and deliver it, I think, at a better value proposition. Our menu pipeline is strong."

July is off to a strong start, and third quarter sales are expected to grow between 4 and 5 percent.

"McDonald's continued success reflects the fundamental strength of our business model and unprecedented alignment around our customer-focused strategies. I am pleased with our second quarter performance and confident that the united efforts of our owner-operators, suppliers and employees will drive profitable growth for our shareholders over the long term, despite the continuing challenges of our economic environment," said CEO Jim Skinner.

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