Investors may recall McDonald's(NYSE: MCD) second-quarter results weren't exactly thrilling. The fast-food chain missed revenue estimates, in addition to falling short of its earnings estimates. Indeed, same-store sales fell here and abroad, with the domestic slump being the first one since COVID-19-crimped 2020.
As CEO Chris Kempczinski explained during the quarter's earnings conference call, "Beginning last year we warned of a more discriminating consumer, particularly among lower-income households. And as this year progressed, those pressures have deepened and broadened."
Those pressures haven't eased in the meantime, it appears.
That's the takeaway from the company's decision to continue its $5 meal deals through December, anyway. First introduced in June, the value-minded program meant to rekindle sales growth was only supposed to last a month. Given that they were one of the few menu items many of its core customers -- people living in households that don't quite qualify as "affluent" -- felt they could afford in this inflation-riddled environment though, the company is willing to prolong the initiative.
And that's apt to be a drag on the current quarter's results.
Consumers still feeling cash-strapped
It's certainly no secret that many consumers are a bit cash-strapped right now. In addition to McDonald's executives saying as much during July's second-quarter earnings call, other consumer goods outfits' chiefs are echoing the observation.
As PepsiCo's CEO Ramon Laguarta put it a couple of months ago, "In the U.S., there is clearly a consumer that is that is more challenged. They want more value to stay with our brands." Procter & Gamble's top brass agreed in its quarterly earnings call held the same month. Even Dollar General is lamenting the headwind that's disproportionally impacting the less-affluent demographic.
Fortunately, companies aren't powerless to combat the impact of ever-rising prices on consumers. While the average price for an average meal at McDonald's these days is in the ballpark of $10 (and much more, for larger or more premium choices), the restaurant chain can package up some of its value-menu items into a respectable combo priced at $5 each.
It's not ideal, however. Aside from less revenue per patron, many franchisees claim the offer is fiscally "unsustainable" and "necessitates a financial contribution by McDonald's" to continue. And that was in May. It's not like operating or ingredient costs have come down in the meantime. If anything, they've gone up. The meals' value-minded price point clearly hasn't.
But it works. Without offering any real specifics, McDonald's management touted the strong demand in the company's second-quarter earnings call.
The headwind's adverse impact on earnings
Connect the dots. For McDonald's to make a decision that not only crimps revenue but also frustrates franchisees, it's a clear sign that this company's core customers are still keeping their purse strings pretty tightly cinched. Just as it was last quarter, it's apt to be a challenge for the quarter currently underway.
Analysts seem to think so, too. Although the consensus revenue forecast of $6.76 billion for the three-month stretch ending in September is above the year-ago comparison, it's only slightly better than the $6.69 billion worth of business McDonald's did in the third quarter of 2023.
Earnings are expected to roll in only slightly better as well, up from the year-ago figure of $3.17 per share to $3.19. Just bear in mind that that number's been dialed back since last quarter, and could be lowered again if consumers don't get some meaningful price relief soon.
And it's not like the fast-food chain is set to experience great growth following one more tough quarter. Analysts' fourth-quarter outlooks are similarly lackluster. As McDonald's CFO Ian Borden conceded in July's conference call, "We expect customers will continue to feel the pinch of the economy and a higher cost of living for at least the next several quarters in this very competitive landscape" -- a message he made a point of delivering more than once during the call.
Too much risk (and not enough reward) from here
The knee-jerk reaction to the decision was a bullish one. That is to say, McDonald's shares moved higher on the news that its $5 meal deals would remain in place (at least) through December. And given how the company's executives are labeling the challenging environment as an opportunity to win market share, the initial response makes enough sense.
Now, take a step back and look at the bigger picture. The economic backdrop that was considered problematic for McDonald's a quarter ago is still in place. As such, don't be surprised to see the same ultimate result. That's another disappointing quarterly report.
If you were already on the fence about this restaurant stock, its recent rally from July's low to a multimonth high may be a prime opportunity to sidestep this risk.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
