McDonald’s 2Q16 Earnings Call Notes

McDonald’s (MCD) Stephen J. Easterbrook on Q2 2016 Results

Expanding all day breakfast menu

“Over the past few quarters, we’ve heard from customers looking for more choice in the All Day Breakfast menu. Those with muffin sandwiches on the menu asked for biscuits. Those with biscuit sandwiches on the menu asked for muffins. We listened, worked through the operational challenges, and this fall, we’ll begin offering muffins, biscuits and McGriddles all day in all U.S. restaurants.”

Brand is improving

” In the U.S., we are seeing further evidence of improved brand perceptions according to a recent YouGov report that measures consumer perceptions across 1,400 brands. McDonald’s was ranked fourth most improved brand across all brands measured, and the most improved within QSR.”

Comps not as strong as previous quarters because of softening industry growth

“Beginning with the U.S., comparable sales for the second quarter increased 1.8%. Whilst modestly positive, this growth was not as strong as the last two quarters. This is due, in part, to the recent softening of the IEO industry, which experienced minimal growth for the trailing 12-month period ending in May at only 40 basis points.”

Consumer slowdown across most consumer segments

“on the industry, well, clearly, it’s been fairly well documented on the consumer slowdown across most consumer segments, to be honest with you, through the second quarter. And therefore, we are very mindful of our competitive position, the competitive gap. So it was important to us that we maintain that competitive advantage and fought for market share. We’re not immune from what’s happening in the outside world at all, but nor are we letting that deflect our focus on what really matters to us and our customers.”

There’s better value to eat at home currently

“I think the general sense is there’s a couple of things at play. I mean, first of all, there is a widening gap between food away from home and food at home, where the commodity decreases are being passed through by the grocers. So the food at home, there’s value to be had for families there, whereas eating out, there is a price inflation environment. So that’s a small part of it.”

Broader level of uncertainty in consumers’ minds

“I think generally, there’s just a broader level of uncertainty in consumers’ minds at the moment, both trying to gauge their financial security going forward, you know, whether through elections or through global events, people are slightly mindful of an unsettled world. And when people are uncertain, when families are uncertain, caution starts to prevail and they start to hold back on spend.”

We are affected by lower spend elsewhere

“clearly, we generate a lot of our own business directly, but also we do benefit from people moving around, going to the malls, driving around, going on vacations. And if people are reining in their spend across broader categories, that will have a little bit of a flow-through to us as well.”

Getting close to lapping all day breakfast launch

” From the All Day Breakfast launch in October of 2015, we’re now almost lapping that, that time and it’s continuing to give us strong incremental sales, strong incremental margin and cash flows and incremental visits as well, and the same with McPick 2. So I think these are now platforms that are just going to continue to work hard for us at that kind of steady-state ongoing level.”

Kevin M. Ozan – Chief Financial Officer & Executive Vice President

Facing rising costs in many markets

“While we are benefiting from favorable commodity costs around the world, we are facing rising labor costs in many of our markets. As a result, we are carefully balancing price increases with a focus on maintaining our strong value proposition, which remains a key pillar of McDonald’s brand, to drive guest counts. In the U.S., second quarter pricing year-over-year was up about 3% compared with food away from home inflation of 2.6%.”