January 30, 2019 / 1:10 PM / 22 days ago

McDonald's warns of headaches in 2019 as overseas business booms

(Reuters) - McDonald’s Corp warned higher labor costs, expenses for remodeling stores and a stronger dollar would weigh on its earnings in 2019, after a strong performance outside the United States powered better-than-expected fourth quarter results.

A sign for the U.S. fast food restaurant chain McDonald's is seen outside one of their restaurants in Sint-Pieters-Leeuw, near Brussels, Belgium February 14, 2018. REUTERS/Yves Herman

The world’s biggest fast-food chain is still struggling in its home market, where it is battling a barrage of promotions from rival chains with offers ranging from $1 coffees to Uber Eats deliveries.

That is being countered by the strength of a global operation which the company has modernized faster and that generated same-store sales growth of 4.4 percent in the fourth-quarter, above expectations of 3.9 percent - and almost twice the figure of its 14,000 U.S. outlets.

“The persistent strength of non-U.S. markets is especially impressive in-light of slowing growth in China and economic softness in Europe, particularly in the UK where MCD’s business appears nearly unstoppable,” said Bernstein analyst Sara Senatore.

Shares of the company, however, pulled back from initial gains after executives hinted of more trouble ahead in a post-earnings conference call. They were down 0.5 percent at $181.09 in afternoon trading.

Chief Financial Officer Kevin Ozan said he expected commodity prices to rise by 1 to 2 percent in the United States and about 2 percent in key international markets, while currency fluctuations would knock 8 to 10 cents per share off earnings in the first quarter and from 13 to 15 cents in the full year.

“We recognized there are significant challenges,” Chief Executive Officer Stephen Easterbrook told analysts.

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Worried by drops in customer traffic, the burger chain is remodeling U.S. outlets to introduce digital ordering kiosks, new mobile ordering, pay and pickup services - looking to replicate the success of these moves overseas.

It has removed artificial preservatives from classic burgers, switched to fresh rather than frozen beef for its Quarter Pounders and added cheap dollar menus to draw in customers and fend off competition at breakfast time.

A partnership with Uber Eats has begun to improve delivery and overall service times and the company said deliveries were now a $3-billion business for its franchise and fully-owned stores globally.

Same-store sales in the United States, however, are still lagging. They rose just 2.3 percent in the fourth quarter, the slowest pace in nearly two years and missed Wall Street estimates for the third straight quarter.

Total revenue fell 3 percent to $5.16 billion in the quarter, which was in line with estimates, but dipped largely due to the company selling restaurants to franchisees.

“The industry throughout the year certainly was competitive, both from a price and value perspective,” Easterbrook said.

Reporting by Aishwarya Venugopal and Uday Sampath in Bengaluru; Editing by Shounak Dasgupta and Sriraj Kalluvila

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