McDonald’s (MCD) customers are tightening their belts again in the second quarter as they struggle to pay for their Big Mac.
On Monday morning, the company reported second-quarter earnings that missed Wall Street estimates for revenue, profit and store sales. This proves that even America’s most dominant fast food player is not immune to challenging macro conditions.
For the quarter ended June 30, McDonald’s reported revenue of $6.49 billion, up 2.01% year over year, compared to estimates of $6.63 billion.
Adjusted earnings of $2.97 also came in lower than the expected $3.07, according to Bloomberg consensus data.
Global same-store sales, including company-owned and franchised stores, fell 1%, compared with estimates of a 0.84% increase. That’s the first quarterly decline in that metric since the fourth quarter of 2020, during the COVID shutdowns.
“Consumers are more discriminating with their spending,” CEO Chris Kempczinski said in the earnings release. The team is focused on “excellent execution” of providing “reliable, everyday value” and “accelerating strategic growth drivers such as chicken and loyalty,” he said.
In the second quarter, fast-food restaurants introduced a series of limited-time bundle offers in an effort to provide value after years of price increases. McDonald’s recently announced plans to extend its $5 meal deal through August. The deal was launched towards the end of the quarter on June 25.
McDonald’s wants to re-emphasize its position in the market.
“Consumers continue to recognize us as the value leader relative to our key competitors, but it is clear that our value leadership gap has narrowed recently. We are working to resolve this quickly,” Kempczinski said on the earnings call.
In the US, same-store sales fell 0.7%, due to a decline in footfall. It is the first decline in US retail sales in 16 quarters. This was partly offset by increases in menu prices. The positive growth in digital services and delivery was a bright spot in a gloomy quarter.
Internationally owned locations saw a decline of 1.1%, driven by negative sales growth “in a number of markets”, driven by France.
International franchise locations saw revenue decline 1.3% year-on-year, driven by the ongoing impact of the war in the Middle East and slowing same-store sales growth in China.
“China is a very competitive environment right now,” Kempczinski said. “Consumer confidence in China is quite weak, and you see in our sector as well as across a wide range of consumer sectors that consumers are very much looking for deals.”
As consumers look for value and deals, loyalty members have captured nearly $7 billion in digital sales across 50 markets, exceeding the $6 billion reported in the first quarter. Over the past twelve months, these members accounted for $26 billion in systemwide sales.
McDonald’s had a very successful second quarter last year, when the Grimace Shake promotion stole the show. That performance proved hard to beat.
“Sentiment is low here, with many feeling that short-term initiatives around offering value are not enough to offset the headwinds in the mix,” Citi analyst Jon Tower wrote in a note to clients ahead of the results.
“Longer-term investors view the valuation as attractive,” with the company’s valuations working out “eventually,” Tower added. But it is uncertain how long it will take for US sales growth to ‘accelerate again’.
Many have their eyes on McDonald’s prospects for the second half of the year, and whether McDonald’s can regain momentum in terms of sales growth and foot traffic.
An increase in the $5 meal deal could help. According to a memo obtained by Yahoo Finance, 93% of all McDonald’s restaurants voted to extend the $5 meal deal, which was originally limited to July.
The company’s U.S. president, Joe Erlinger, said the deal is performing well among low-income customers, increasing sales and boosting brand equity. affordable image after a number of price increases
Customers attracted by the deal can try other items. The average check size was over $10 for the $5 meal deal.
When the offering was formally rolled out on June 25, visitor traffic that week was down 0.8% year over year, according to Placer.ai. Traffic then increased by 2.8% the week of July 1 and 2.4% the week of July 8 compared to last year.
The deal, which has been extended through August, could last even longer. Kempczinski said McDonald’s is working with franchisees to extend the deal. But he admitted the deal itself has a “limited offering.”
“We just have to be very thoughtful and deliberate as we figure out what our national platform for everyday value and affordability is going to be,” he said. Franchisees “see the impact and importance of a national platform for everyday value and affordability.”
However, Erlinger set the tone for investors not to be too optimistic.
“Ultimately, in this highly competitive landscape, we expect customers will continue to feel the pressure of the economy and higher costs of living in the coming quarters. We therefore believe it is critical that we consider these factors. to grow market share and return to sustainable growth based on guest volume for the brand,” he said on the call.
BTIG analyst Peter Saleh told Yahoo Finance ahead of the results that the promotion could even be extended into September as McDonald’s works on a permanent value platform such as buy one, get one, or a version of the $1 $2 $3 Dollar Menu.
“This is kind of a bridge to that value menu,” Saleh said ahead of the expansion announcement. He added that franchisees are learning that the $5 deal, which includes a choice of a McDouble burger or a McChicken sandwich, four-piece Chicken McNuggets, small fries and a small soda, “doesn’t allow the customer to spend very much to eat.” variety.”
A longer term for the $5 deal could also put pressure on margins.
“Franchisees tell us their margins are being impacted by [the deal]and it makes this a lot less profitable, or in certain cases, not profitable at all,” Saleh said. Some franchisees are backing away from marketing the deal, such as video ads on the in-store screen or signage in the windows.
Here’s what McDonald’s reported for the second quarter, compared to what Wall Street expected, according to Bloomberg consensus data:
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Gain: $6.49 billion versus 6.63 billion
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Adjusted earnings per share: $2.97 vs. $3.07
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Global same-store sales growth: -1.0% vs. +0.84%
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US same-store sales growth: -0.7 vs +1.04%
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Sales growth of international companies in the same store: -1.1% vs. +1.85%
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International same-store franchise sales growth: -1.3% vs. +0.41%
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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.
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