But long term, questions remain: What happens when the refranchising process ends? How is technology going to play into sales and industry dominance?
It's clear, however, the big story for this quarter was currency fluctuations. Factoring in the changes in many overseas currencies, McDonald's had many pullbacks this quarter. If you include currency translations, revenues declined 4%. Operating income decreased 2%. And, diluted earnings per share remained flat year over year at $1.72.
But figuring in the numbers with a constant currency basis, operating income increased 3% and earnings increased 5%.
Looking deeper, systemwide sales increased 6% in constant currencies, too. Revenues were hit by currency translations, but on a constant basis, revenues increased 2%. Comparable store sales increased 5.4%, while the larger overall number of franchised locations put a damper on revenue potential.
The U.S. market showed strength in the first quarter, too. Comparable store sales grew 4.5%. The company credited the strength to deal offerings like the "2 for $5 mix and match", the "bacon event," as well as "donut sticks."
Still, U.S. operating income decreased 5%. McDonald's credited the decline to lower gains on "sales of restaurant businesses" and lower operating-margin dollars. The fast food company also said the decline was partially offset by increases in franchise margins, as well as lower general and administrative costs. This has been a concern I've held with McDonald's. They've used franchising as a way to lower costs and unlock earnings value by putting more of the work on the franchisees. It has worked so far, but this is a prime example of an instance where franchise income isn't picking up the slack.
Looking globally, first-quarter comp sales increased 6%. While MCD repeated strength across each of the international markets, the two performers of note were France and the United Kingdom. The currency shifts in the area caused operating income to stagnate without growth. If you look at it from a constant currency basis, McDonald's international operating income increased 8%. The company noted that the growth (on a constant currency basis) stemmed from stronger franchise dollar margins. International developmental license segments increased comparable sales growth by 6%.
Promotions and store improvements do seem to be drawing in customers. When you exclude some additional taxes that MCD incurred, the company beat estimates on earnings. Adjusted earnings of $1.78 beat estimates of $1.75. Revenues of $4.96 billion beat estimates of $4.93 billion, and same store sales growth of 5.4% beats expectations of 3.4%.
In some ways, the first quarter looks good -- if you're willing to accept a lot of adjustments and exclusions. If you don't want to accept those adjustments, the quarter wasn't all that great.
Joining the seemingly unstoppable wave (for better or worse) of corporate attempts to use technology to further its business, McDonald's recently announced the acquisition of Dynamic Yield, a Chicago based startup. It also announced it has taken a minority stake in Plexure, the company that runs MCD's mobile app overseas. Both deals amount to less than $310 million, but demonstrate that MCD is continuing to pursue ways to innovate and improve both its access to customers and the quality of its stores.
McDonald's plans to use Dynamic Yield's tech programs at its drive thru windows, using machine learning to entice customers to spend more (a rather disconcerting notion isn't it?). The moves serve to keep MCD ahead of the pack, while attempting to limit competitor's access.
Looking forward, I still have one main concern for McDonald's: As their stores refranchise, they remove a lot of their costs. They also remove a lot of their revenue potential by cutting in a middle man. Long term, I wonder whether it will prove to be a limiting mistake. Thus far, it certainly has pleased shareholders.