The CEO of McDonald’s, Chris Kempczinski, declared on Thursday that the rise in fuel prices due to the Iranian conflict disproportionately affected low-income consumers, as the fast-food chain warned of a challenging start to the second quarter.
McDonald’s, like several fast-food chains, heavily relies on low-income clientele and continues to offer promotions to attract financially constrained diners.
The company reported higher-than-expected revenue and profit for the first quarter, with global sales at constant perimeter increasing by 3.8%, slightly below forecasts. The stock erased its pre-market gains to show a slight decline in the afternoon session.
‘The high level of fuel prices is the central issue we are currently facing,’ Kempczinski specified during the results conference call. ‘It is probably fair to say that… (the macroeconomic environment) is certainly not improving and could even degrade slightly.’
Several American restaurant chains such as Shake Shack, Papa John’s, Wingstop, and Domino’s have reported a slowdown in their quarterly sales growth, citing the impact of the Iranian conflict.
Wall Street analysts highlight that consumers with lower incomes are becoming more selective, increasingly opting for simpler orders over full menus.
INFLATION AFFECTS MARGINS
The CFO, Ian Borden, pointed out a weaker start to the second quarter, with sales turning slightly negative in April due to the persistent pressure from fuel prices on purchasing power.
He also noted a squeeze on margins among American franchisees, resulting from input inflation (food products, paper, energy) and rising operating costs that franchisees are unable to fully pass on to their pricing.
These cost pressures impact the cash flows of franchisees, even where sales remain positive, and also affect the margins of company-owned restaurants in the US. The group added that it would conduct a review of its network of franchisees.
The margins of company-owned and operated restaurants in the US dropped by 25% to $59 million compared to last year. ‘Either I fix this issue, or we will find franchisees capable of better managing these restaurants,’ Kempczinski emphasized.
FOCUS ON ‘LOW PRICE’ OFFERS
The company is banking on a renewed pricing strategy to support demand until the end of the year.
In mid-April, McDonald’s expanded its ‘McValue’ platform in the US, introducing daily items under $3 as well as a $4 breakfast deal.
The pressure on American restaurant attendance and rising fuel prices are ‘well integrated by investors,’ according to Alex Fasciano, an analyst at CFRA, who added that slightly better-than-expected results reassure about McDonald’s execution capability in a challenging environment.
The group’s total revenue reached $6.52 billion, exceeding estimates of $6.47 billion according to LSEG data. Adjusted earnings per share stood at $2.83, compared to the expected $2.74.
In the first quarter, US comparable store sales growth settled at 3.9%, below the target of 4.2%. Globally, comparable sales increased by 3.8%, missing the consensus of 3.95%, although it marks an improvement from the 1% decline a year ago.
The company reaffirmed its investment spending forecast for the year, between $3.7 and $3.9 billion, and maintains its plan to open around 2,600 restaurants worldwide.
