Burger chain warns of continuing business risks, pointing to rising fuel, food costs.
McDonald’s has been raising prices in response to growing costs for labor, food and materials.PHOTO: ROBYN BECK/AGENCE FRANCE-PRESSE/GETTY IMAGES
McDonald’s MCD -0.03%▼ Corp. said higher prices and value menu offerings helped U.S. sales in the second quarter, but total revenue fell and the outlook remains uncertain amid inflation and weakening consumer sentiment.
“The operating environment across the competitive landscape remains challenging,” Chief Executive Chris Kempczinski said.
Mr. Kempczinski said Tuesday that McDonald’s is planning for a wider range of scenarios given weakening consumer sentiment and the possibility of a global recession. The company is looking at whether it needed to offer more value options on its menus in markets, he said.
Companies this earnings season are signaling concerns as consumer confidence drops and inflation runs at its highest level in decades. Walmart Inc. on Monday said it was having to cut prices to reduce inventory as consumers pulled back, and expected its profits to fall as a result. Several high-tech companies have noted slowing growth recently.
McDonald’s on Tuesday said higher prices and value menu offerings pushed same-store sales up 3.7% in the U.S. from last year’s period, outpacing analysts’ expectations. Sales of all types of meals, particularly breakfast, were higher, the company said. Lower-income customers are choosing more value offerings and fewer combo meals, McDonald’s said, while it is gaining some consumers who are shifting away from sit-down and fast-casual restaurants.
McDonald’s said it expects commodity and wage inflation, along with rising energy prices, to affect restaurant margins for the rest of the year. For instance, the company expects U.S. food and paper costs this year to increase by 12% to 14% from 2021 levels, and wages to grow by 10% on an annual basis. Executives said they expect inflation to be more pronounced in Europe than in the U.S.
McDonald’s shares rose 2% to $255.50 in morning trading. Through Monday’s close, they were up 2.6% this year, compared with a drop of more than 10% in the S&P 500.
The company said Tuesday that its U.S. franchisee- and company-owned restaurants raised prices in its most recent quarter at similar levels to earlier this year. The company said in April that its U.S. locations had increased menu prices by an average of 8% in the first quarter compared with last year’s period.
Some McDonald’s owners have dropped the chain’s U.S. deal offering soda and other cold beverages of any size for a dollar despite the company’s recommendations to keep them. A number of franchisees said they moved away from the longstanding deal in light of rising costs and dropping it has improved their profit.
McDonald’s said Tuesday that while it still offers national promotions, local restaurants increasingly determine value offerings at their locations. Mr. Kempczinski said the company is trying to encourage more North American consumers to purchase meals through its app and loyalty program.
Some of the nation’s biggest food suppliers and restaurants, from Kraft Heinz Co. to Campbell Soup Co., said they would continue to raise prices as they face higher costs. Casual-dining chain BJ’s Restaurants Inc. told investors last week that it would increase its menu prices by 2% next month, after a 1.4% rise in June. Domino’s Pizza Inc. said prices during its most recent quarter increased by nearly 6% on average as it lifted prices on menus, offers and delivery fees.
McDonald’s officially exited Russia in May after more than three decades of operations there, selling its hundreds of restaurants to a local franchisee. The company Tuesday reported a $1.3 billion pretax charge for the year connected to the sale of its Russian business.
Same-store sales rose 9.7% globally during the period ended June 30, the company said, noting that it was excluding its Russian stores from that figure.
Russia was a large company-operated market for McDonald’s, which has steadily sold restaurants to franchisees across the world to run. McDonald’s had 847 restaurants in Russia as of last year and owned 84% of them, the company said.
The fast-food giant posted a 3% drop in revenue to $5.72 billion, coming in under analyst projections of $5.8 billion, according to FactSet. Excluding currency effects, revenue would have increased 3%, McDonald’s said. The annual drop in total revenue was the company’s first since December 2020, FactSet figures show.
The company said its profit fell by nearly half to $1.19 billion, or $1.60 a share, during the second quarter, due in part to the pretax charge from the sale of its business in Russia.
Excluding that and other one-time items, adjusted earnings were $2.55 a share. Analysts surveyed by FactSet had been expecting $2.47 a share.