McDonald’s Faces Sales Growth Challenge Amid Discounting Efforts
As the fast-food industry gears up for a week of earnings reports, McDonald’s (MCD.N) is bracing for a continued slowdown in sales growth. The iconic burger chain is grappling with the reluctance of low-income consumers to dine out, despite aggressive value menu promotions aimed at attracting budget-conscious diners.
Analysts are keeping a close eye on McDonald’s, which is set to unveil its first-quarter results on Tuesday. The report will set the stage for other major players in the sector, including Starbucks (SBUX.O) and Yum Brands (YUM.N), home to KFC, who are scheduled to release their financials later in the week.
BTIG analyst Peter Saleh has highlighted concerns regarding customer traffic and average check sizes at McDonald’s, citing “heavy discounting” as a strategy to regain the attention of lower-income consumers. In response, McDonald’s has doubled down on its Dollar Menu, offering a range of items at $1, $2, and $3 price points. Competitors like Wendy’s and Taco Bell have also stepped up their game with similar discounts and app-exclusive deals.
The Context
Despite a sluggish start to the year due to adverse weather conditions and persistent inflation, visits to McDonald’s showed a 2.4 percent increase from January to March. However, the company’s International Developmental Licensed Markets segment continues to face challenges, including geopolitical tensions and subdued demand in China.
Wall Street analysts suggest that discounting may remain a prevalent theme throughout the year for fast-food chains as they strive to boost sales amidst economic headwinds. This strategy has prompted at least five brokerages to lower their price targets on McDonald’s stock in April alone.
The Fundamentals
Expectations are set for McDonald’s to report a modest 2.36 percent rise in global same-store sales, with earnings per share (EPS) anticipated at $2.72. Yum Brands is projected to see a slight 0.34 percent increase in worldwide same-store sales, with an EPS forecasted to climb to $1.20.
Wall Street Sentiment
The performance of fast-food chains’ stocks has been mixed, with McDonald’s shares dropping nearly 8 percent year-to-date. In contrast, Chipotle has seen a surge of about 40 percent. The S&P 500 Restaurants index has seen a modest uptick but still lags behind the broader S&P 500.
Despite the current challenges, McDonald’s holds an average rating of “buy” from 38 analysts, with a median price target of $325. Yum Brands maintains a “hold” rating with a median price target of $145.04, reflecting cautious optimism in the sector’s ability to navigate through economic uncertainties and cater to the evolving needs of low-income consumers.
