McDonald’s Speaks of Cautious Consumer But Traction with $5 Meal Deal

By Brian Nelson, CFA

McDonald’s (MCD) reported results July 29 that showed both revenue and non-GAAP earnings per share coming in lower than the consensus forecast. Consolidated sales were flat (up 1% in constant currencies), while systemwide sales fell 1% (up 1% in constant currencies). Global comparable store sales fell 1% in the quarter, lower than the consensus forecast, with negative comparable store sales across all of its segments. U.S. comps fell 0.7%, International Operated Markets [IOM] comps fell 1.1%, while International Developmental Licensed Markets [IDLM] comps dropped 1.3%.

Performance wasn’t as bad as the decline in comps would suggest given the 11.7% comp McDonald’s lapped from the same quarter of 2023. U.S. comps were impacted by negative comparable guest counts, which was only partially offset by average check growth driven by strategic menu price increases. IOM was weak due to in part to sluggish sales in France, while its IDLM performance was impacted by the war in the Middle East, as well as weakness in China. We think strategic price increases may be hurting traffic from lower-income households, many of which may say that fast food has become more of a luxury than a convenience.

Management spoke of a more discriminating consumer in the press release:

We are confident that Accelerating the Arches is the right playbook for our business and as consumers are more discriminating with their spend, we are focused on the outstanding execution of delivering reliable, everyday value and accelerating strategic growth drivers like chicken and loyalty.

McDonald’s consolidated operating income fell 6% (5% in constant currencies), while adjusted operating income excluding a couple current-year charges fell 2% (flat in constant currencies). Diluted earnings per share fell 11% (10% in constant currencies). Excluding current-year charges, diluted earnings per share came in at $2.97, a decline of 6% (5% in constant currencies). Management’s commentary on the call regarding its $5 Meal Deal was positive, however:

Our restaurants in Upstate New York have been running a local $5 meal deal that was highly successful, performing well with lower income customers and driving overall incremental sales. By leveraging learnings from within our own system, we brought this to life for customers across the US.

We’ve seen a lot of enthusiasm and the number of $5 meal deals sold are above expectations. Trial rates of the deal are highest amongst lower-income consumers and sentiment towards the brand around value and affordability has begun to shift positively…

…There’s no question that the franchisees see the impact and the importance of a national everyday value and affordability platform. And so we’re working through that at pace with them. In the meantime, obviously, we’re continuing to offer consumers great value with the $5 meal deal extending in 93% of our restaurants into August, and we’re working with our franchisees to extend that even longer.

All told, McDonald’s second quarter results weren’t great. Comparable store sales and consolidated operating income fell during the period, but McDonald’s lapped a very strong second quarter of 2023, which included a double-digit comp. Diluted earnings per share also declined at a mid-single-digit pace. That said, however, McDonald’s $5 meal deal is gaining traction, and we think it is part of the solution for lower guest counts driven by its recent strategic pricing actions. McDonald’s hasn’t been a strong performer in the Best Ideas Newsletter portfolio of late, but we remain optimistic on its prospects in the current inflationary environment. Shares yield 2.6%.