McDonald’s Earnings Deep Fry Wall Street Expectations

“The [McDonald’s] brand is about fun. We really create delicious ‘feel-good’ moments for everybody that are also light hearted.”

That was McDonald’s VP of Global Digital Experiences, Farhan Siddiqi, back in May when he dropped in to talk with Karen Webster about McDonald’s future in retail, as the digital doors were unlocking for one the world’s best known and far-reaching consumer brands.

As the market opened yesterday, McDonald’s got to have a “fun,” “feel good” moment of its own, as the strength of its performance in Q2 sent stock prices soaring — actually spiking — into record territory.

In short, it was a good day under the golden arches, and investors and analysts were happy with what they saw.

“To us, what this shows is that this is a business that had been in turnaround mode under new CEO Steve Easterbrook, and we are starting to see some of these positive results now both domestically and internationally, which is very encouraging,” Trip Miller, managing partner at Gullane Capital Partners and a McDonald’s shareholder, told CNBC.

So what was in the secret sauce (we’re sorry, that will probably be the only fast food pun in this earnings report) for McDonald’s today? The short answer: fancy burgers, cheap sodas and line-skipping.

For a more complex answers…

McDonald’s by the Numbers

Earnings per share (EPS) was one of three big wins on the day. EPS clocked in at $1.70, as opposed to the $1.62 for which the market was looking. McDonald’s revenue was also higher than expected — $6.05 billion — as opposed to $5.96 billion predicted ahead of time.

The big winning number that shocked Wall Street, however, was same-store sales — up 3.9 percent as opposed to the 2.9 percent for which analysts were looking. Globally, the beat was even bigger: Same-store sales were up 6.6 percent, as opposed to the 3.7 percent analysts predicted.

“A lot of people had really not given McDonald’s a chance in the last five years, but this shows they are coming back, and a lot of people are enjoying their experience,” Miller said.

So, what are they enjoying?

The Four Pillars

“We’re building a better McDonald’s, and more customers are noticing,” CEO Steve Easterbrook noted in a post-earnings release. “Our relentless commitment to running great restaurants and keeping the customer at the center of everything we do is generating broad-based strength and momentum across our entire business.”

McDonald’s also noted that its continued efforts at turnaround revolve around four main pillars: menu innovation, store renovations, digital ordering and delivery in order to achieve sustained growth and attract more customers.

That menu innovation kicked off about a year ago, with the highly popular expansion into all-day breakfast, and has continued as McDonald’s has sought to up its food quality ante with its “Signature Crafted” sandwiches. Customizable with ingredients like pico guacamole and maple BBQ bacon, the gourmet McDonald’s experience prices range between $5 and $7 per burger or chicken sandwich. And though that is pricier than a normal burger, McDonald’s has found that lowering the price of soda to $1 tends to help the higher cost go down a bit easier.

And Signature burgers are not where this is ending. Regionally, McDonald’s is using its franchise locations to test-drive possible future menu items, like bacon cheese fries and gourmet coffee offerings.

Moreover, supplemented by McDonald’s rapidly kicked up interest and investment in its digital efforts over the last year in mobile ordering, delivery and payments, the brand is not only offering customers better quality goods to buy — but a lot of better ways to buy them more easily.

“On the margin, each of these [digital] initiatives is probably a small component. But when you put together the whole mosaic of three or four initiatives running [simultaneously], coupled with the easy compares and the momentum they’ve had coming in, it’s a powerful combination,” Barclays Analyst Jeff Bernstein noted post-earnings.

McDonald’s confirmed it will be expanding those efforts in a variety of ways — the most immediately visible of which will be mobile ordering kiosks appearing in a greater variety of locations.

What’s Next

When we talked to Farhan Siddiqi a few months ago, he noted that trouble with making big changes at places like McDonald’s — restaurants that serve unaccountably large numbers of consumers worldwide daily — is a bit like trying to turn a battleship around. It takes a lot of work and energy to change directions in something that large.

But, he noted, once that time-consuming turnaround is over, things can get really interesting.

“We don’t think of it in terms of operational efficiency; we think about it in terms of operational excellence,” he noted. “What excites me is what we can do once we build the basic platform — that is when the fun begins.”

Looks like the platform is built — and the fun has officially begun.