McDonald's Cites High Gas Prices for Weak Q2 Start, Eyes Value Deals
McDonald's Financial Performance and Strategic Response to Economic Pressures
By Savyata Mishra
May 7 (Reuters) - McDonald's CEO Chris Kempczinski said on Thursday higher gas prices linked to the Iran war were disproportionately hurting low‑income consumers, as the burger chain warned of a weak start to its second quarter.
McDonald's, like several fast-food chains, relies heavily on low-income consumers and have been offering up value deals to lure more cash-strapped diners.
The company posted better-than-expected first-quarter revenue and profit, while global comparable sales rose 3.8%, narrowly missing expectations. Its shares pared premarket gains and were marginally down in afternoon trading.
Impact of Gas Prices and Macroeconomic Environment
"Elevated gas prices are the core issue we're seeing right now," Kempczinski said on the earnings call. "I think probably it's fair to say ...(macro environment) is certainly not improving and it may be getting a little bit worse."
Several U.S. restaurant chains such as Shake Shack, Papa John's, Wingstop and Domino's have reported weaker quarterly sales growth, citing a fallout from the Iran war.
Changing Consumer Behavior
Lower-income consumers are becoming more selective, Wall Street analysts have said, increasingly trading down to simpler, single‑item orders rather than full meals.
Inflation and Margin Pressures
INFLATION CRIMPING MARGINS
CFO Ian Borden flagged a weaker start to the second quarter, with sales turning slightly negative in April due to persistent pressure on lower‑income consumers from higher fuel prices.
He also noted margin pressure at U.S. franchisees from inflation across food, paper and energy inputs, as well as higher operating costs that franchisees cannot fully offset through pricing.
Franchisee and Company-Operated Restaurant Margins
Cost pressures are affecting franchisee cash flow, even where sales remain positive, and are also weighing on margins at U.S. company‑operated restaurants, the company said, adding it would review its franchisee network.
U.S. company‑owned and operated restaurant margins slipped 25% to $59 million from a year ago. "Either I fix that, or we’re going to find franchisees who could run the restaurant better," Kempczinski said.
McDonald's Value Strategy and Future Outlook
RAMPING UP 'VALUE' DEALS
The company is leaning on a refreshed value strategy to support demand through the rest of the year.
In mid‑April, McDonald's expanded its McValue platform in the U.S., adding everyday menu items priced under $3 alongside a $4 breakfast meal deal.
Analyst and Investor Perspectives
Pressure on U.S. restaurant traffic and higher gas prices are "well understood by investors", said CFRA analyst Alex Fasciano, adding that results came in slightly ahead of expectations, reassuring investors about McDonald's execution in a challenging environment.
The company's total revenue of $6.52 billion exceeded estimates of $6.47 billion, according to data compiled by LSEG. On an adjusted basis, it earned $2.83 per share, beating expectations of $2.74.
For the first quarter, U.S. same‑store sales growth of 3.9% missed expectations of a 4.2% increase. Globally, McDonald's comparable sales rose 3.8%, missing estimates of 3.95%, though it was an improvement from a 1% decline a year ago.
The company reaffirmed its full-year capital expenditure forecast of between $3.7 billion and $3.9 billion, and stuck to its plans to open about 2,600 restaurants globally.
(Reporting by Savyata Mishra in Bengaluru; Editing by Arun Koyyur)