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On Monday, McDonald’s Corporation (NYSE:MCD) reported its second quarter results that showed it is having a challenging time, missing Wall Street estimates as it continues to lose low-income consumers. Softening sales at McDonald’s is an alarm for the industry and its peers like Chipotle Mexican Grill (NYSE:CMG) who is due to report its latest earnings on Wednesday, as pinched consumers grapple with a challenging macroeconomy.
McDonald's first sales drop since 2020 is a warning for the wider industry.
Like McDonald’s and Starbucks Corporation (NASDAQ:SBUX), Chipotle also continued to raise prices to cope with rising costs. While McDonald’s and Starbucks have also been dealing with boycotts due to the Israel-Hamas war, Chipotle has been facing social media complaints regarding reduced and inconsistent portion sizes. But Wall Street still expects Chipotle to hold onto its strong momentum with second quarter earnings. Starbucks will be reporting its earnings after the closing bell on Tuesday. Like McDonald’s, Starbucks is also likely to post a drop as the world’s largest coffee is facing intense competition. Starbucks also raised its coffee prices and its April quarter was surprisingly weak both on the top- and bottom-line fronts owed to a sharp decline in orders, resulting it’s the first same-store YoY sales drop since late 2020. But Starbucks is more of an “experiential” brand while McDonald’s is about the value-for-money. With its turnaround plan yet to play out, Starbucks is in for some kind for reinvention, while McDonald’s discounts to combat falling traffic.
For the quarter ended on June 30th, McDonald’s reported revenue of $6.49 billion that was short of LSEG’s consensus estimate of $6.61 billion. Store sales contracted 1%, falling for the first time since 2020’s fourth quarter, while StreetAccount expected growth of 0.4%. U.S. same stores alone shrank 0.7% YoY.
Net income dropped to $2.02 billion, or $2.80 per share. When adjusted for one-time items, such as by excluding the future sale of its South Korean business, McDonald’s earnings per share amounted to $2.97, which is also below LSEG’s consensus estimate of $3.07 per share.
Outlook does not include better times ahead.
Executives expect these challenges to linger throughout the year, with weakened customers struggling with a higher cost of living in a highly competitive environment.
McDonald’s needs to find a way to retrieve low-income consumers.
Raising menu prices about 40% on average in the U.S. alone since 2019 finally caught up to McDonald’s that now needs to revitalize its customer traffic.
CEO Chris Kempczinski stated that recent $5 value meal offering was initially successful in changing the narrative, but it cannot translate into higher sales over night as it was rolled out only days before the second quarter ended, on June 25th to be exact. Last week, McDonald’s used to extend the offering as it did bring back low-income customers, exceeding year-to-date daily visit averages, according to a report from Placer.ai. Admitting that the brand’s value leadership has contracted, Kempczinski noted that the fast-food legend is the one who write playbook when it comes to value and consumers still recognize the brand as the value leader compared to its rivals, assuring that the fast-food chain is working actively to regain its edge.
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