McDonald’s MCD-N reported a surprise drop in sales worldwide on Monday, its first decline in 13 quarters, as deal-seeking consumers shy away from higher priced menu items, including Big Macs.
Persistent inflation has forced lower-income consumers to shift to more affordable food options at home. That has led fast food chains such as McDonald’s, Burger King, Wendy’s and Taco Bell to lean on value meals to spark customer traffic.
McDonald’s shares, which are down 15% this year, rose nearly 4% after company executives said the $5 meal deal launched late in June sold above expectations. They said the company was working with franchisees in a bid to extend it beyond August.
The company, which stuck to its 2024 forecast for operating margin of mid-to-high 40% range, said it would be more selective with price increases to protect profitability.
“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,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.
Global comparable sales fell 1% in the second quarter, compared with expectations of a 0.5% increase. Overall revenue rose 1%.
CEO Chris Kempczinski said there is a lot more deal-thinking from consumers who have become “very discriminating.” “Consumer sentiment in most of our major markets remains low,” he said.
McDonald’s results dovetail with comments last week from Coca-Cola CEO James Quincey, who said there had been “some softness in away-from-home channels” in North America, an indication of fewer people eating out.
“The biggest hit for McDonald’s is the low-income consumer has really cut back on visits and that is more than offsetting the typical trade down McD normally sees in tougher economic times,” said Edward Jones analyst Brian Yarbrough.
U.S. comparable sales fell 0.7% in the quarter ended June 30, compared with a 10.3% jump a year ago. Sales in international markets, which made up nearly half its 2023 revenue, dropped 1.1%, driven by weakness in France.
A slower-than-expected recovery in China and the Middle East conflict hurt the performance of McDonald’s business segment where restaurants are operated by its local partners, as sales declined 1.3% compared with a 14% jump a year earlier.
Companies like McDonald’s and Starbucks have also suffered from consumer boycotts linked to the Gaza war, which hit their sales in the Middle East markets.
McDonald’s, however, stuck to its capital expenditure budget of up to $2.7 billion, with more than half of that earmarked for new restaurants in the U.S. and international markets.
It earned $2.97 per share on an adjusted basis in the second quarter, missing expectations of $3.07.