Highlights From MCD's Q3 Conference Call: Continue Market Share Gains and Expansion Overseas

McDonald's Corp (NYSE: MCD) reports Q3 EPS of $1.15, 4 cents better than the analyst estimate of $1.11. Revenue for the quarter was $6.05 billion, which compares to the estimate of $6.10 billion.

Highlights From MCD's Q3 Conference Call:

• Same store sales were up 3.8%.
  
• (CEO) The headline from all of this is that our business remains strong, and we're taking the right steps to succeed in today's environment.
  
• Global comparable sales were up 3.8%, operating income increased 11% in constant currency, and EPS reached $1.15, a 14% increase in constant currency.
  
• Let's begin with the U.S. where comparable sales for the quarter increased 2.5% and operating income grew 6%.
  
• Our Dollar Menu continues to resonate in the marketplace, and this summer the U.S. enhanced it's value offerings locally with $1 beverages on fountain and tea drinks.
  
• Turning now to Europe, sales and guest count increases were strong with comp sales up 5.8% driven by the U.K., France, and Russia, resulting in an operating income increase of 10% in constant currencies.
  
• Germany also delivered a solid quarter with both comparable sales and guest counts up amid a highly price sensitive environment.
  
• Let's turn to Asia Pacific, Middle East, and Africa, or APMEA, where comparable sales increased 2.2% and operating income grew 21% in constant currencies. Across this region, convenience initiatives, value, core menu, and breakfast continue to drive results.
  
• In fact, Q3 operating income in China was up 25%. The China team continues to run great restaurants, provide consistent value, and offer convenience including drive-thrus, extended hour, McDelivery, and dessert kiosks to drive the business. We remain bullish on the long-term opportunity and continue to increase our annual restaurant openings thereby about 15%.
  
• Japan is another market where the economy is facing challenging headwinds.
  
• I want to reiterate that the fundamental strength of our global business continues. We are gaining share, as our plan to win strategies are clearly working.
  
• (CFO) In a challenging global economy, we once again delivered solid comparable sales growth, grew market share, and improved our profitability with combined operating margin increasing to nearly 30%.
  
• This performance along with the impact of re-franchising contributed to company operating margins
  rising 110 basis points to 19.3%.
  
• In Q3, our U.S. basket of goods increased only 1.7%.
  
• Our full-year 2009 outlook is for the U.S. to be up about 2%, which includes a projected decrease of about 3% in the fourth quarter.
  
• We are seeing similar trends in Europe, with our third quarter grocery bill rising just 1.5%.
  
• We expect the full-year increase in our European basket of goods to be about 3%, which also includes a projected decline of about 3% in the fourth quarter.
  
• As for 2010 commodity costs, our preliminary outlook is favorable.
  
• Moving to Europe, strong comparable sales growth along with more moderate commodity cost increases and the benefit from re-franchising helped drive company operating margin up 40 basis points in the quarter. The U.K., France, and Germany all improved as our tier menu approach and limited time offerings continue to resonate with customers.
  
• Could you discuss a little bit on pricing and the role of inflation and how you think about pricing in the U.S.? You had about a third, I think, of your comp had been coming from pricing before. As we come into a period of deflation, I'm curious to know what you're thinking about with that price and will you let that perhaps roll off in a world where food costs are not going up? Thanks very much. (A)We're holding the line on pricing. Our pricing power is not what it was, and of course we have not necessarily the same need for price increases and certainly can't pass on those price increases to our consumers at this point in time where value is so very important. As you know, we did take a price increase a year ago in October, and at the beginning of that month. And because commodity costs were on the rise, and looking at what we faced going into 2009, but right now we are holding the line on pricing and have held the line throughout most of the year.
  
• I just wanted to follow up on that question. I heard you about the October price increase a year ago. But what is the current pricing traffic mix component in the September same store sales number. And just sort of looking forward into October, based on what you said about current trends, how would that apply to the same three metrics, pricing, traffic, and mix? (A)If you look at September, about 50-50. About 40 to 50% was traffic and the rest was price. And obviously some of that price starts rolling off, but that gives you an idea for September.
  
• Just a quick follow-up on that one. On the price component, could you give us an idea of how many fell off in October? And then secondly, could you comment on the competitive environment? It seems like it's getting a lot more promotional, and do you think that's impacting your business, and if so, how are you responding to that? (A)We're not going to specifically quantify the impact of one month's price increases, but as Jim mentioned, we were increasing -- we had a price increase in October, and if you recall in December last year, we had the change in the double cheeseburger came off the dollar menu, and so we had fourth quarter if you think about those price increases we had those helping us. Those are rolling off as we enter the fourth quarter this year, but as Jim mentioned also from a profitability standpoint, with a decline in our basket of goods, we don't have the need to increase prices. And in this
  environment where it's really a battle for market share, our ability to hold the line on pricing we think is one of the reasons we're continuing to outperform the marketplace. (A)And from a competition point of view, we have been out there with our Dollar Menu for seven years. We don't jump in and out like other folks are, and so we will advertise it. We will let the consumer know that that continues to be there. They trust us on that situation, and we see it in the market share that we're taking. So we will continue to stay aggressive that way during these times.

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