Shares of McDonald's(NYSE: MCD) bounced between positive and negative territory following its first-quarter earnings report as investors digested what the fast-food operator had to say. While the stock ultimately finished nearly unchanged the day of its report, down -0.2%, there was nonetheless a lot to unpack from the company's earnings report and conference call that could shape where the stock heads over the next few years.
Let's look at some of the positive and negatives from its report and whether investors should look to buy or sell the stock.
A solid quarterly report
McDonald's was facing some very difficult year-over-year comparisons with its Q1 report, and in that light, it reported a very solid quarter. The fast-food giant grew its global comparable sales by 1.9%. While that is not a huge jump, it marked the company's 13th straight quarter of global same-store growth and came against a 12.6% increase a year ago.
Its U.S. markets grew their comparable sales by a solid 2.5% on top of 12.6% growth last year. Meanwhile, comparable-store sales of its international company-operated stores rose 2.7% on top of 12.6% growth a year ago.
Overall, revenue rose a solid 5%, or 4% excluding currency impacts, to $6.2 billion. Meanwhile, its adjusted earnings per share (EPS) rose 2% to $2.70.
McDonald's talked about the success of its better burger, which it began to roll out at the start of the year. These burgers include small tweaks, such as how they are assembled and cooked, to improve their quality and taste. The company said the new method helped lift burger sales and get better customer-satisfaction scores.
McDonald's said it will test a larger burger in a few markets later this year. If the tests are successful, it will roll the new bigger burger out globally.
Image source: Getty Images.
Warning signs
Despite the solid quarterly results, there were a number of warning signs that the current environment will become more difficult for McDonald's moving forward.
One of the biggest warning signs in the quarter for McDonald's was a decline in traffic to its restaurants. On its conference call, management said the company saw flat or declining traffic in the U.S. as well as in other major markets, including the U.K., Australia, Canada, Germany, and Japan. It added that across almost all its major markets traffic is slowing, and it expects quick service restaurant industry traffic in the U.S. to be negative for the full year.
Coming out of COVID-19, McDonald's and the quick service restaurant industry as a whole greatly benefited from inflation and being able to take a lot of price hikes on menu items. However, the company has previously warned that consumers have begun to push back, and on its Q1 conference call, it called consumers "price-weary." McDonald's has a larger percentage of lower-income customers, so pricing power moving forward could become an issue. The company said it would be prudent and thoughtful about any other price increases it will take this year and spent much of the call talking about value.
McDonald's also talked a lot about the macro headwinds it has been seeing. It noted that it continued to see these pressures at the start of Q2.
Now McDonald's isn't the only quick service restaurant chain to see headwinds, as Yum Brands, the owner of Taco Bell, Pizza Hut, and KFC, saw its Q1 restaurant sales decline -3%, while coffee chain Starbucks saw its global same-store sales drop -4%. However, Chipotle reported very strong results with same-store sales up 7%, as did Wingstop, which saw its domestic comparable-store sales soar 21.6% and company-owned locations rise 6.2%. So this slowdown isn't impacting the entire space equally, but consumers are certainly being more selective.
Buy, sell, or hold?
After riding prior price hikes, McDonald's is getting to where it has started to out-price its core-customer base. This led to traffic declines in Q1, but it could lead to negative same-restaurant growth in the future. If this happens, it would likely pressure the stock moving forward.
MCD PE Ratio (Forward) data by YCharts.
McDonald's trades at about 22 times forward price-to-earnings (P/E), which is similar to Yum and Starbucks. That's a pretty typical historical valuation for the company. Given the likely headwinds the company is facing from its customer base being pushed to the limit on pricing and the impact of pricing on traffic, I'd prefer to buy the stock when it goes into the bargain bin. It's not there currently.
Over the long haul, McDonald's should be a solid choice but right now, it's facing too many headwinds, and there likely will be better buying opportunities down the road. As such, it could be a good idea to lighten up on positions in the restaurant stock.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill, Starbucks, and Wingstop. The Motley Fool has a disclosure policy.
