A McDonald's restaurant in Paris.JOEL SAGET/AFP/Getty Images
McDonald’s MCD-N CEO Chris Kempczinski said on Thursday the burger chain is well-set to navigate near-term volatility from the conflict in Iran, but warned prolonged global supply-chain disruptions could push costs higher and further squeeze demand.
Restaurant chains that depend on everyday customers are seeing weak demand as low-income diners tighten their budget due to higher gas prices, while wealthier customers keep spending.
McDonald’s posted better-than-expected first-quarter revenue and profit, while global comparable sales rose 3.8 per cent, narrowly missing expectations. Its shares pared premarket gains and were largely unchanged in morning trading.
“Elevated gas prices are the core issue we’re seeing right now,” Kempczinski said on the earnings call, adding that inflation at the pump “is going to disproportionately impact low-income consumers, and we expect the pressures there are going to continue.”
“I think probably it’s fair to say ... (macro environment) is certainly not improving and it may be getting a little bit worse,” Kempczinski said.
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Several U.S. restaurant chains such as Shake Shack SHAK-N, Papa John’s PZZA-Q, Wingstop WING-Q and Domino’s DPZ-N have reported weaker quarterly sales growth, citing a fallout from the Iran war.
Lower-income consumers are becoming more selective, Wall Street analysts have said, increasingly trading down to simpler, single-item orders rather than full meals.
Inflation crimping margins
CFO Ian Borden flagged a weaker start to the second quarter, with sales turning slightly negative in April due to persistent pressure on lower-income consumers from higher fuel prices.
He also noted margin pressure at U.S. franchisees from inflation across food, paper and energy inputs, as well as higher operating costs that franchisees cannot fully offset through pricing.
Cost pressures are affecting franchisee cash flow, even where sales remain positive, and are also weighing on margins at U.S. company-operated restaurants, the company said, adding it would review its franchisee network.
U.S. company-owned and operated restaurant margins slipped 25 per cent to US$59-million from a year ago. “Either I fix that, or we’re going to find franchisees who could run the restaurant better,” Kempczinski said.
Ramping up ‘value’ deals
The company is leaning on a refreshed value strategy to support demand through the rest of the year.
In mid-April, McDonald’s expanded its McValue platform in the U.S., adding everyday menu items priced under US$3 alongside a US$4 breakfast meal deal.
Pressure on U.S. restaurant traffic and higher gas prices are “well understood by investors,” said CFRA analyst Alex Fasciano, adding that results came in slightly ahead of expectations, reassuring investors about McDonald’s execution in a challenging environment.
The company’s total revenue of US$6.52-billion exceeded estimates of US$6.47-billion, according to data compiled by LSEG. On an adjusted basis, it earned US$2.83 per share, beating expectations of US$2.74.
For the first quarter, U.S. same-store sales growth of 3.9 per cent missed expectations of a 4.2-per-cent increase. Globally, McDonald’s comparable sales rose 3.8 per cent, missing estimates of 3.95 per cent, though it was an improvement from a 1-per-cent decline a year ago.