Rising prices have kept diners away from many restaurants, but not McDonald’s Corp.
As the ubiquitous burger chain prepares to report fourth-quarter results on Tuesday with its stock close to record highs, Wall Street could get pickier about signs of the company’s growth, though analysts were largely upbeat heading into the report. Some said McDonald’s
size made it a “defensive” play within the fast-food universe, as the industry tries to pay workers more and handle higher ingredient costs, resulting in higher prices for its food.
Restaurant analyst Mark Kalinowski, chief executive of Kalinowski Equity Research, says consumer unrest with higher prices for food is focused elsewhere, though.
“They’re not talking about the price of eggs at Denny’s
” Kalinowski said. “They’re talking about the price of eggs at their local grocery store. Even though Denny’s has taken price like a lot of chains have, it just seems like Americans are more upset by the change in price at grocery stores and supermarkets.”
McDonald’s has consolidating its grip on the hamburger-focused fast-food industry, after the pandemic gutted many smaller restaurants and left those that survived struggling with higher costs. As independent restaurants and bigger chains raise their own prices — to either offset those costs or to gauge what people will pay — concerns have grown about the impact on demand.
But BofA data showed a widening gap between McDonald’s U.S. same-store sales and those of its rivals since the pandemic hit. When the company reported third-quarter results in October, management noted gains from “strategic price increases and positive guest counts” in the U.S. And it recently rolled out a plan to speed up restaurant openings, improve classic menu items and expand its digital-ordering capabilities.
Kalinowski attributed McDonald’s traffic to its ability to stay relevant among younger consumers — along with its thousands of stores and digital and drive-through capacity. He noted the popularity of the chain’s celebrity meals — such as those based on the preferences of Travis Scott and J Balvin — Happy Meal collaborations and, in a throwback to the 1980s, Halloween buckets. He added that even as restaurants, more broadly, raise prices, they’ve been spared some of consumers’ anger over inflation.
Kalinowski also noted that Chick-fil-A was becoming a larger object in McDonald’s rearview.
“I think McDonald’s realizes, for the long term, that’s a competitor that they need to keep a close eye on,” he said.
What to expect
Earnings: Wall Street expects McDonald’s to earn $2.46 a share for the fourth quarter, according to FactSet, up 10% from the same quarter last year. Estimize, which crowdsources projections from hedge funds, academics and others, has a consensus of $2.51 a share.
Revenue: McDonald’s is expected to report sales of $5.72 billion, according to FactSet, down around 5% from a year ago. Estimize contributors on average expect $5.8 billion. Same-store sales are expected to rise 8.6%.
Stock movement: McDonald’s stock has declined in the session following six of the past eight quarterly earnings reports, but four of those declines were by less than 1%. Shares have increased 8.4% in the past year, as the S&P 500 index
has declined 8.2% and the Dow Jones Industrial Average
— which counts McDonald’s among its 30 components — has dropped 2.2%.
What analysts are saying
U.S. same-store sales will again be a focus for analysts, as will Europe, currently mired in a cost-of-living crisis, and China, which is trying to navigate a post-zero-COVID era. They have questions about competition from rapidly-growing Chick-fil-A, and whether McDonald’s can offer up a chicken sandwich that holds up in comparison.
UBS analysts said McDonald’s stock was “well-positioned given defensive attributes in an increasingly difficult macro” environment. They also said they believed that “customer demand in Europe stayed largely resilient.”
Elsewhere, Stephens analyst Joshua Long noted “successful price/value messaging across key platforms (breakfast, $1/$2/$3 value menu, and 2 for $6, as examples) with a focus on/around core menu items” in the U.S.
Chief Executive Chris Kempczinski, during McDonald’s earnings call in October, said restaurants’ own higher costs — along with the politics of managing its ranks of independent franchise owners — would keep any discount war at bay.
“Our expectation is that the industry is going to stay rational from a pricing standpoint,” he said. “And I think part of that is just going to be borne out of self-interest, which is everybody is experiencing the food and paper inflation. Everybody is experiencing the labor inflation.”
“And some of our competitors, their franchisees are not in the same position as our franchisees,” he continued. “So I think even if there’s a desire to try to get more promotional in some areas to address maybe any traffic headwinds that somebody might face, I think you’re going to run into a lot of resistance from franchisees who are just not going to be in a position to engage in that.”