McDonald’s reported a surprising drop in global sales on Monday, marking its first decline in 13 quarters. The decrease is attributed to consumers seeking more affordable options and avoiding higher-priced menu items like Big Macs.
Persistent inflation has led lower-income consumers to favor cheaper food alternatives at home, prompting fast food chains like McDonald’s, Burger King, Wendy’s, and Taco Bell to rely on value meals to attract customers. McDonald’s shares, which have declined 15% this year, saw a nearly 4% rise after executives reported that the recently launched $5 meal deal exceeded expectations. The company is now considering extending the deal beyond August in collaboration with franchisees.
Despite the sales dip, McDonald’s maintained its 2024 forecast for an operating margin in the mid-to-high 40% range and plans to be more selective with price increases to protect profitability. Brian Mulberry, client portfolio manager at Zacks Investment Management, expressed optimism, stating, “Even though things (traffic) are soft now, they should be getting better in the back half of the year … with better value on the menu.”
In the second quarter, global comparable sales fell 1%, against expectations of a 0.5% increase, though overall revenue rose by 1%. CEO Chris Kempczinski noted increased deal-seeking behavior among consumers, who have become “very discriminating” due to low consumer sentiment in major markets.
McDonald’s results align with comments from Coca-Cola CEO James Quincey, who observed “some softness in away-from-home channels” in North America, indicating fewer people are dining out. Edward Jones analyst Brian Yarbrough highlighted that the biggest impact on McDonald’s comes from lower-income consumers cutting back on visits, outweighing the typical trade-down behavior seen in tougher economic times.
U.S. comparable sales dropped 0.7% in the quarter ending June 30, compared to a 10.3% increase a year ago. International sales, which comprised nearly half of McDonald’s 2023 revenue, fell by 1.1%, with notable weakness in France. Additionally, a slower-than-expected recovery in China and the Middle East conflict negatively impacted the segment where restaurants are operated by local partners, leading to a 1.3% decline compared to a 14% increase a year earlier.
Despite these challenges, McDonald’s is sticking to its capital expenditure budget of up to $2.7 billion, with over half allocated for new restaurants in the U.S. and international markets. The company reported earnings of $2.97 per share on an adjusted basis for the second quarter, falling short of the expected $3.07.