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McDonald“s beats profit estimates, warns short-term inflation to persist

2023-01-31T12:32:32Z

McDonald’s Corp (MCD.N) on Tuesday beat Wall Street estimates for quarterly profit on higher menu prices, even as it warned short-term inflationary pressures would persist in 2023.

Shares of the burger chain fell about 1% to $268.50 in premarket trading after gaining about 6% in the last 12 months.

The company’s fourth-quarter global same-store sales also beat estimates with a 12.6% rise, compared with the average analyst estimate of an 8.6% increase, according to IBES data from Refinitiv.

McDonald’s benefited from higher menu prices, increased restaurant traffic and sales in the UK, Germany and France rose despite fears of a recession in Europe.

The earnings report comes as investors watch for signs of a recession after record inflation last year. McDonald’s could benefit if more lower-income customers switch over from higher-priced restaurants – as it did in the third quarter.

The company reported profit of $2.59 per share, an increase of 16%. Analysts on an average expected profit of $2.45.

Like other fast-food chains, Chicago-based McDonald’s raised prices of its burgers and fries last year to keep up with surging commodity and labor costs.

Even so, traffic rose 5% for full-year 2022 as McDonald’s meals remained less expensive than many competitors, drawing low-income consumers.

In October, Chief Financial Officer Ian Borden said the company was “gaining share right now among low-income consumers” in the United States because of McDonald’s “affordability.”

He did not define “low income” but data provider the NPD Group defines annual household incomes of $75,000 or less as “lower income.”

The company launched its Cactus Plant Flea Market Box – an adult version of its Happy Meal for kids – with core menu items including its Big Mac and Chicken McNuggets, helping it post better-than-expected U.S. sales.

Visits to McDonald’s U.S. locations rose 26% in the fourth quarter versus 2019 and were up nearly 30% compared with the previous year, according to data from location analytics firm Placer.ai. That is compared to a 0.6% decline for fast food overall in the fourth quarter over the previous year.

“While McDonald’s reputation as a value player helps in an environment where lower- to middle-income consumers are looking to stretch household budgets, the company is also driving visits through other means like celebrity meals and other marketing partnerships, its loyalty program, and improved drive-thru operations,” said Placer.ai’s head of analytical research, R.J. Hottovy.

Visits to some other fast-food chains started to fall last summer as they hiked menu prices, he said.

McDonald’s U.S. comparable sales rose 10.3% in the quarter ended Dec. 31. Global revenue dropped 1% to $5.93 billion because of the impact of the stronger U.S. dollar against foreign currencies while in constant currencies, revenue rose 5%.

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