McDonald's (MCD) recently unveiled its first-quarter earnings. Revenue increased by 7%, and net income grow by 5%. The star of the show was not emerging economies but the U.S., where comparable sales grew 8.9%. International comp sales growth was tepid, with European comp sales increasing 5% while the corresponding figure for Asia Pacific, Middle East and Africa was 5.5%.

The ability to keep reinventing itself to appeal to consumers domestically as well as internationally is the reason we think McDonald's deserves a higher price than the current market price.

We look at what steps McDonald's took that led to such impressive comp sales growth rates in the U.S. McDonald's competes with Yum Brands (YUM), Subway, Starbucks (SBUX), Wendy's (WEN), Chipotle Mexican Grill (CMG), among many others.

Most of the growth in comp sales can be attributed to increases in customer traffic or average spending per customer, since menu price increases were subdued in 2011. And since McDonald's seems to be omnipresent in the U.S., achieving either of the two is a herculean task. This says a lot about the company's ability to adapt to changing consumer demand and economic environment.

McDonald's was able to increase customer traffic through a combination of factors.

Extended hours

First, McDonald's extended the timing of its outlets or kept them open for the whole day. More than 89% of McDonald's outlets in the U.S. open by 5 a.m., and 40% are open 24/7.

New menu items

Second, the fast-food chain added menu products that helped attract a greater number of customers. In 2011, the company launched Fruit & Mango oatmeal, Mango Pineapple Smoothies, Peppermint Mocha as well as other items. The new menu additions continued in 2012 with the introduction of Chicken McBites and the experimentation with bakery products.

Such constant innovation is possible because McDonald's spends a great deal on research, development and testing of new products to ensure they appeal to American consumers.

Refurbishing/re-imag​ing existing restaurants

Third, McDonald's upgraded its restaurants to include more comfortable seating, free Wi-Fi and even McTV. In fact, the company plans to spend half of its capital expenditure in 2012, estimated at a whopping $2.9 billion, to re-image and upgrade its existing U.S. restaurants to make them appear more upscale.

This will help the company compete directly with Chipotle, Starbucks, etc., that fall into fast-casual or casual restaurant segment. Moreover, this will also help the company to some extent to cast off the stereotype of being a large scale, inexpensive burger serving restaurant chain and appeal to a wider range of consumers.