McDonald’s Corp. has not been affected by rising prices and diners stay away from other restaurants.
As the ubiquitous burger chain prepares to report fourth-quarter results on Tuesday with its stock close to record highs, Wall Street could getpickier about signs of the company’s growth, though analysts were mostly upbeat heading into the report. 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, according to some.
Restaurant analyst Mark Kalinowski, chief executive of Kalinowski Equity Research, says consumer unrest with higher prices for food is focused elsewhere, though.
Kalinowski said that they were not talking about the price of eggs. They are talking about the price of eggs in the store. Even though Denny’s has taken price like a lot of chains have, it just seems that Americans are more upset by the change in price at grocery stores and supermarkets.
McDonald’s has consolidated its hold on the fast-food industry after the swine flu decimated many smaller restaurants. Concerns about the impact on demand have grown as independent restaurants and big chains raise their own prices.
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BofA data showed a widening gap between McDonald’s US same-store sales and those of its rivals. When the company reported third-quarter results in October, management noted gains from price increases and positive guest counts in the U.S., and 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, digital and drive-through capacity. Happy Meal collaborations and Halloween buckets are two of the popular celebrity meals at the chain, according to him. He said that even as restaurants raise prices, they have been spared some consumers’ anger over inflation.
Kalinowski said that Chick-Fil-A was becoming a bigger issue for McDonald’s.
McDonald’s needs to keep a close eye on that competitor for the long term.
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.
McDonald’s is expected to report revenue of $5.72 billion, which is down 5% from a year ago. Estimize contributors will expect $5.8 billion. Same-store sales are predicted to rise.
McDonald’s stock declined in the session after six of the past eight quarterly earnings reports, but four of those declines were less than 1%. In the past year, the S&P 500 index has declined 8.2% and the DOW Jones Industrial Average has dropped 2%), but shares have increased 8.4%.
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.”
The SEC charged the ex–McDonald’s CEO with making false statements.
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.
Chris Kempczinski said during McDonald’s earnings call in October that restaurants’ higher costs and politics of managing its ranks of independent franchise owners would keep a discount war from happening.
The industry is expected to stay rational from a pricing standpoint. I think part of that is self-interest, because everybody is experiencing the food and paper inflation. Everyone is experiencing labor inflation.
Some of our competitors are not in the same position as ours. Even if there is a desire to try to get more promotional in some areas, I think you are going to run into a lot of resistance from franchisees who are not going to be in a position to engage.
