McDonald's Corp. (MCD, Financial) shares rose more than 4% after the company reported first-quarter earnings that blew past Wall Street estimates. Comparable store sales, the most important metric for restaurant chains, grew 1.7% in the U.S. market and 4% globally, while the market was expecting a sales loss of 0.8% in the U.S. and an increase of 1% globally.
The world’s largest restaurant chain posted earnings per share of $1.47 and revenue of $5.68 billion, while the market was expecting earnings per share of $1.33 and revenue of $5.53 billion. Wall Street was expecting comparable store sales to be much lower than what the actual number was, which partially explains why the company overshot estimates by a wide margin.
McDonald’s has been diligently working to turn things around. The company has already decided to take the highly franchised route and is now moving toward a target of 95% franchised restaurants by 2018. While improving capital structure was a goal on the financial side, the company also embarked on several menu updates, launched all-day breakfast and recently unveiled new crew uniforms.
Some of the changes have begun to yield results. The company said it benefited from changes to its menu and value and convenience initiatives, which it had set forth during an investor day in March. During the quarter, McDonald's rolled out three different sizes of its classic Big Mac, offered $1 soft drinks and $2 McCafe beverages and expanded its all-day breakfast offerings, as reported by CNBC.
The stock price has been steadily trending upward since October of last year, making all-time highs while year-to-date returns read 15%-plus. Sales growth will slow down as the company increases its franchised unit ratio, but margins will increase. It is a low-risk, low capital investment model, which makes McDonald's an ideal bet for investors who are looking for a dividend stock to add to their portfolio. McDonald’s current dividend yield of 2.69% makes it an attractive investment.
If you own McDonald’s, the numbers you should be watching from now on are comparable store sales, operating margins and dividends, not sales growth.
Disclosure: I have no positions in the stock mentioned above and no intention of initiating a position in the next 72 hours.
Start a free 7-day trial of Premium Membership to GuruFocus.
