McDonald’s is set to report first-quarter earnings on Tuesday before the market opens. Despite the struggles of the fast-food industry, the Big Mac maker is likely to hold up better.
Analysts polled by FactSet expect McDonald’s to post $2.72 per share earnings and $6.16 billion in sales for the first three months of 2024, marking a 3.4% and 4.4% growth from the same quarter a year ago, respectively.
Inflation has taken a toll on consumer spending. Lower-income households, the primary customers of fast-food chains, are squeezed particularly hard, especially after food-stamp assistance was cut and student loan payments resumed last year.
McDonald’s raised prices by 10% last year. Management noted that lower-income consumers have visited its stores less frequently and are spending less when they do. Meanwhile, price gains at grocery stores have slowed down this year.
“Some of those consumers are just choosing to eat at home more often,” said CFO Ian Borden at a March conference, warning that the fast-food industry might see negative traffic growth in 2024.
Pressure from inflation will continue in 2024, especially as California boosts the minimum wage for fast-food workers from $16 to $20 per hour. Menu prices in California were already 3% higher on April 15 than two months ago, according to data from Gordon Haskett.
Still, that price gain is relatively moderate compared with peers like Chick-fil-A, Starbucks, Shake Shack, and Chipotle Mexican Grill. McDonald’s has signaled that it would provide more support to franchisees through increased advertising spendings and product innovation.
“This is an opportunity for us to gain share, because this is an impact that’s going to hit all of our competitors,” CEO Chris Kempczinski said last year in an earnings call, “We believe we’re in a better position than our competitors to weather this.”
Indeed, with its larger scale and healthier margin, Wall Street appears optimistic that McDonald’s could win the fast-food war despite the industry’s overall struggles. The stock has declined 8% year to date, but analysts are expecting a 17% upside on average.
McDonald’s has been making many moves to spur further growth. Last year, the company launched a new drink-focused chain called CosMc’s to take on Starbucks and Dunkin’ in the afternoon beverage market.
The fast-food chain also announced an exclusive deal to sell Krispy Kreme doughnuts at thousands of its restaurants across the country, which could further enhance its dominance during breakfast hours with little incremental labor costs.
Already the world’s largest restaurant company, McDonald’s announced plans in December to open another 10,000 new restaurants in the next four years, pushing the total number of stores to 50,000 by the end of 2027.
The company also aims to boost the active members of its loyalty program from 150 million now to 250 million by 2027, and more than double the program’s sales to $45 billion a year.
Write to Evie Liu at evie.liu@barrons.com