McDonald’s Boosts Prices Which Boosts Shares

MCD

McDonald’s, the world’s largest fast-food chain, announced third quarter financials today which broadly beat Wall Street estimates. The company, which has been through numerous recessions and inflationary cycles before, managed to increase prices for most of its menu items without impacting customer demand. Shares were trading up 3.5% in the morning session and are down only 0.8% for the year versus the 19.2% decline in the S&P 500. McDonald’s has typically been seen as a defensive stock that performs well during times of turmoil.

Same-store sales, the critical key performance metric for restaurants, were up 9.5% year over year, well ahead of the average analyst expectation for an increase of 5.8%. International operated markets comparable sales were up 8.5% beating the estimate of a 5.6% increase. U.S. comparable sales were up a very strong 6.1% thanks in part to a robust marketing campgain. Analysts were looking for an increase of 3.7%.

International developmental licensed markets, otherwise known as countries where licensees operate McDonald’s locations, comparable sales climbed 16.7%, ahead of the 9.1% estimate. The surge was driven by robust growth in Brazil and Japan. Same store sales disappointed slightly in China, however, as the country continued its policy of lockdowns which have hampered recovery. The company reported adjusted earnings per share of $2.68 versus the $2.57 expected, but down slightly from last year’s $2.76.

Total revenue for the company was down 5.3% year-on-year to $5.87 billion, but significantly higher than the $5.69 billion estimated. Management said they increased prices strategically throughout the U.S. during the quarter, which helped boost sales. Diners around the world seem more willing to pay for their fast-food meals, despite the cost-of-living increases. Further, most importantly, the company said it was increasing U.S. guest count, progressively taking market share from competitors who have also increased prices

Additionally, McDonald’s mobile app and delivery service have become increasingly important past the pandemic as well. Digital sales were nearly $7 billion in the firm’s top six markets, representing almost 33% of total sales. Chief Executive Officer Chris Kempczikski said that the company remains confident that it can maintain its price hikes without losing demand, especially as the company’s new loyalty program kicks in. The firm reported operating margin of 47% during the three-month period.

Foreign exchange translation losses have weighed on results, and the company would have reported higher year over year revenue and profits without them. The strengthening U.S. dollar has forced most American companies to report lower revenues than what they would have been on a constant-currency basis. The United Sates only represents roughly 38% of total revenue for the company, much lower than most companies in the S&P 500.

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