Author: Savyata Mishra
(Reuters) – McDonald’s on Monday reported an unexpected drop in global sales, its first decline in 13 quarters, as deal-seeking consumers shunned pricier menu items including Big Macs.
Ongoing inflation is forcing low-income consumers to turn to more affordable food options at home. That’s led fast-food chains like McDonald’s (NYSE: ), Burger King, Wendy’s (NASDAQ: ) and Taco Bell to rely on value meals to drive traffic.
McDonald’s shares have fallen 15% this year, but gained nearly 4% after company executives said sales of $5 meals launched in late June exceeded expectations. They said the company is working with franchisees to extend it beyond August.
The company stuck to its mid-to-high 2024 operating profit margin forecast of 40% and said it would increase prices more selectively to protect profitability.
Brian Mulberry, client portfolio manager at Zacks Investment Management, said: “While things (traffic) are soft right now, they should pick up in the second half of the year…with higher value on the menu.”
Global comparable sales fell 1% in the second quarter, compared with expectations for growth of 0.5%. Overall revenue grew 1%.
Chief executive Chris Kempczinski said consumers have become “very discerning” and therefore have more transaction ideas. “Consumer confidence remains low in most of our major markets,” he said.
McDonald’s results dovetail with comments last week from Coca-Cola CEO James Quincey, who said there was “some softness in the away-from-home channel” in North America, suggesting fewer people were eating out.
“The biggest hit to McDonald’s is that lower-income consumers are really reducing their visits, which more than offsets the usual decline in McDonald’s business during tough economic times,” said Brian Yarbrough, an analyst at Edward Jones. Typical trade declines that would occur.
U.S. comparable sales fell 0.7% in the quarter ended June 30, compared with a 10.3% increase in the same period last year. Sales in international markets, which account for nearly half of 2023 revenue, fell 1.1% due to weakness in France.
A slower-than-expected recovery from conflicts in China and the Middle East hurt performance in McDonald’s business unit where restaurants are run by local partners, with sales falling 1.3% compared with a 14% increase in the same period last year.
Companies such as McDonald’s and Starbucks (NASDAQ: ) have also suffered consumer boycotts related to the Gaza war, which has affected their sales in Middle Eastern markets.
However, McDonald’s is sticking to a capital expenditure budget of $2.7 billion, more than half of which is earmarked for opening new restaurants in the U.S. and international markets.
Second-quarter adjusted earnings per share were $2.97, missing expectations of $3.07.
