Tag: McDonald’s Corporation (MCD)

Why MCD’s Pricing Strategy Makes It a Buy

Posted on by The INO.com Team

McDonald’s Corporation (MCD) has once again struck a chord with customers through its clever pricing tactics. The fast-food giant’s $5 meal deal, which was first introduced in May, has turned out to be a big hit with customers feeling the pinch of inflation. Originally planned to run for just four weeks, the deal was so successful that McDonald’s extended it through the summer.

However, the timing of this extension wasn’t accidental. The move came after MCD’s global comparable sales dipped by 1%, and net revenues remained flat compared to the previous year, in the second quarter ended June 30, 2024. The company needed a way to attract more customers, and this budget-friendly bundle turned out to be the perfect solution, with 93% of franchise owners supporting the extension until the end of August.

The bundle, featuring a choice between a McDouble or McChicken, fries, nuggets, and a drink for just $5, became a crowd favorite, with nearly two-thirds of buyers opting for the McDouble. Buoyed by its success over the summer, attracting “tens of millions” of customers, McDonald’s extended the deal once again, this time through December in select U.S. markets.

Joe Erlinger, President of MCD’s USA, stated, “Together with our franchisees, we’re committed to keeping our prices as affordable as possible, which is why we’re doubling down with even more ways to save.”

While the $5 meal deal is certainly a wallet-friendly option, it’s more than just a low price. It’s the company’s calculated response to inflation. As grocery bills and dining-out costs climb, a $5 meal serves as a welcome relief, easing the financial pressure on customers. This strategy is especially targeted at middle-income consumers, a large part of McDonald’s customer base, who typically earn between $48,000 and $65,000 annually.

Moreover, these offers reflect the chain’s commitment to maintaining value, a word that was mentioned nearly 90 times during the company’s most recent earnings calls. And judging by the continued popularity of these deals, it’s clear that customers are “lovin’ it.”

Alongside the value deal, McDonald’s has rolled out a series of other promotions, like $0.50 Double Cheeseburgers on National Cheeseburger Day and $1 10-piece Chicken McNuggets each week. Promotions like free medium fries with any $1 purchase on Fridays, running through the end of 2024, further add to the company’s value-driven approach. These offers aren’t just about saving customers money; they’re also designed to drive more foot traffic into restaurants. The company aims to draw customers in, with the hope they’ll spend more by upgrading their meals or dining with others.

Since the launch of the bundle in late June, McDonald’s has seen a notable increase in in-store visits. Data from foot traffic analytics firm Placer.ai revealed that on the day of the launch, June 25, McDonald’s experienced its busiest Tuesday of the year, with an 8% spike in visits compared to its year-to-date average. Similar trends continued into July, underscoring how well the $5 bundle resonated with consumers.

Does This Move Call for a Price War?

As grocery price inflation shows signs of slowing, more consumers are opting to eat at home. According to the U.S. Census Bureau, restaurant sales increased by 2.7% year-over-year to $94.50 billion in August but remained flat over the last four months. When adjusted for inflation, the sales actually declined by 1.3% compared to August 2023, as reported by the National Restaurant Association.

In this competitive landscape, where consumers hold the power, MCD isn’t the only fast-food chain experiencing increased customer visits. Taco Bell announced a $7 Luxe Cravings Box alongside its $5 Taco Discovery Box and Cravings Value Menu in June. Similarly, Burger King extended its $5 “Your Way Meal” bundle and introduced new items under its “Fiery Menu.” Wendy’s has also joined the fray, offering a $3 breakfast bundle and a $5 combo known as the “Biggie Bag.”

While these promotions may attract short-term traffic, experts caution that they can also set a precedent for consumer expectations regarding discounts. Kristin Lynch, senior director of strategy and analytics at Paytronix, warned, “McDonald’s will have to consider the value associated with their loyalty program.” He believes balancing value and customer expectations is essential, with 166 million loyal members contributing 25% of system-wide sales.

Amid signs of slowing consumer demand, the chain has announced a new store format emphasizing digital kiosks. Some locations are upgrading from traditional menu boards to digital screens designed to showcase promotions and popular items, while printed menus will still be available for those who prefer ordering the old-fashioned way. These enhancements aim to meet the increasing demand for digital options while improving service speed and accuracy.

Bottom Line

As consumers tighten their budgets amid rising prices, fast-food chains are struggling to attract lower-income customers. A recent survey found that nearly 80% of Americans have reduced their fast-food spending because they find it too expensive. In this context, McDonald’s decision to extend its $5 meal deal into winter reflects a strategic response to an ongoing economic struggle that has yet to fully recover.

What started as a summer special has now become an important strategy to bring back budget-conscious diners. This move addresses complaints about rising prices and highlights McDonald’s focus on offering value during tough times. While the company continues to introduce deals, it’s also working on improving its marketing and cutting costs to boost sales.

For investors, MCD’s resilience and ability to adapt its marketing strategies make it a compelling investment opportunity. Therefore, investors could consider scooping up this fast-food giant’s shares, which have returned more than 15% over the past three months. 

Can McDonald's $5 Meal Deal Boost Its Stock Performance?

Posted on by The INO.com Team

McDonald’s Corporation (MCD), the global fast-food chain, recently announced the highly anticipated $5 Meal Deal, set to roll out on June 25 for a limited period at participating restaurants in the U.S. This strategic move comes as part of McDonald’s strategy to enhance affordability and attract customers amid ongoing macroeconomic pressures.

In recent years, McDonald's has faced criticism as prices surged, resulting in less revenue from lower-income consumers and reduced foot traffic in its stores. 

Understanding the $5 Meal Deal

The $5 Meal Deal includes your choice of a McDouble or McChicken sandwich, 4-piece Chicken McNuggets, small fries, and a small soft drink. This offering aims to provide consumers with a substantial meal at a competitive price point, echoing MCD’s commitment to delivering value to its customer base.

The company is extending enticing offers through the McDonald’s App, including a promotion where customers can receive free medium fries with a $1 minimum purchase for “Free Fries Friday,” available nationwide until the year’s end.

Additionally, franchisees in communities are celebrating summer by offering local special deals. For instance, in Memphis, Tennessee, customers can take advantage of a Buy One Get One for $1 deal on breakfast sandwiches and steals on lunch and dinner fan favorites such as a Double Cheeseburger & small fries pairing for $3.50 in Columbus, Ohio. In Western New York, MCD offers a mix-and-match McChicken and McDouble deal for just $3.99.

“Affordable prices and creating memorable moments are what McDonald’s is all about,” stated John Palmaccio, McDonald’s Owner/Operator and Operator’s National Advertising (OPNAD) Fund Chair. “As small business owners, it’s our responsibility to deliver great value to our local communities when they need it most. The $5 Meal Deal is the perfect complement to the everyday local deals customers can find in store and on the app, like the 25 percent off any purchase of $10 or more deal that I'm offering at my restaurants in Savannah, Georgia.”

McDonald’s Enhanced Focus on Affordability

During an earnings call in late April, MCD’s CEO Chris Kempczinski emphasized the company’s commitment to affordability in 2024, responding to customer concerns over recent price increases. According to a report by the New York Post in July, a McDonald’s located at a Connecticut rest stop was pricing a Big Mac combo meal at $18.

“Consumers continue to be even more discriminating with every dollar that they spend as they face elevated prices in their day-to-day spending, which is putting pressure on the industry,” said Chris Kempczinski. “It’s imperative that we continue to keep affordability at the forefront for our customers.”

Moreover, McDonald’s chief financial officer (CFO) Ian Borden said at an investor conference that lower-income customers have been cutting back spending on fast food and other types of restaurants. Borden hinted at concerns about inflation and possibly depleted pandemic savings, which resulted in customers choosing to eat out less often.

MCD reported mixed first-quarter results as profits were hurt by the effects of inflation on consumers and continued boycotts in the Middle East. For the quarter that ended March 31, 2024, McDonald’s reported revenues of $6.17 billion, slightly beating analysts’ estimates by 0.01%. That compared to $5.90 billion in the prior year’s quarter.

The company’s global comparable sales increased 1.9% in the quarter and reported U.S. comparable sales growth of 2.5%. The fast-food chain said the average check rose thanks to higher menu prices; however, it has also scared away some low-income customers.

Demand in McDonald’s International Developmental Licensed Markets was even weaker. The segment, which includes restaurants in the Middle East affected by the Israel-Hamas war and related boycotts, decreased comparable sales by 0.2% during the quarter.

Furthermore, the fast-food chain giant posted a first-quarter non-GAAP net income of $1.96 billion, or $2.70 per share, up 1.1% and 2.7% year-over-year, respectively. However, McDonald’s non-GAAP earnings per share missed the consensus estimate of $2.73.

Historical Impact of Value Meal Promotions on McDonald's Revenue and Stock Price

Historically, MCD’s promotional strategies, particularly those centered around value meal deals, positively impacted its revenue and stock performance. One notable example is McDonald’s “Dollar Menu,” which has been a recurring promotion aimed at offering affordable meal options to customers. Introduced in various forms over the years, including the current “$1 $2 $3 Dollar Menu,” these deals typically feature a selection of items priced attractively at $1, $2, or $3, such as sandwiches, sides, and beverages.

In the past, McDonald’s saw a significant uptick in customer visits and transaction sizes when value menus were heavily promoted. The attraction of affordable pricing has historically driven increased foot traffic and stimulated incremental purchases beyond the promoted items. This phenomenon underscores the effectiveness of value-driven promotions in boosting MCD’s sales volume and overall revenue.

Moreover, the company’s ability to sustain profitability during value-driven promotions is supported by its operational efficiencies and scale advantages, allowing it to maintain attractive margins despite lower price points. Simultaneously, McDonald’s stock experienced periods of growth attributed to enhanced consumer appeal and increased market share within the fast-food industry.

Bottom Line

During the first quarter, MCD slightly beat analyst expectations for revenue. However, the company’s earnings missed estimates as its results were hurt by the impact of elevated inflation on consumers and boycotts in the Middle East. As a result, CEO Chris Kempczinski said in a late April quarterly earnings call that McDonald’s has to be “laser-focused on affordability.”

The fast-food chain giant has since promised lower prices and expressed interest in winning over inflation-weary customers. As McDonald’s is exploring more avenues to win customers back, it recently announced the $5 Meal Deal, available starting June 25 for a limited time at participating restaurants nationwide. This move is a response to a decline in low-income customer traffic and a broader industry shift toward more value-focused offerings.

Historically, McDonald’s promotions like the “Dollar Menu” and “$1 $2 $3 Dollar Menu” illustrate their potential to impact revenue and stock performance significantly. By attracting more customers through value offerings, McDonald’s increases short-term sales and strengthens its market position and investor appeal over the long term.

Therefore, McDonald’s $5 Meal Deal represents a pivotal initiative to capitalize on consumer demand for value-driven meal options. While the immediate financial impact will depend on execution and consumer response, historical data suggests a potential positive impact on revenue and stock performance. Investors and market analysts will likely closely monitor the rollout and consumer reception, anticipating insights into MCD’s resilience and strategic agility in navigating current economic challenges.

McDonald’s (MCD) Could Be Involved With Another Coffee-Related Lawsuit: Buy or Sell?

Posted on by The INO.com Team

McDonald's Corporation (MCD) finds itself in hot water again as a new civil case was filed on September 14 at the San Francisco Superior Court. An elderly woman named Mable Childress alleged that she suffered severe burns on her stomach, groin, and leg after she spilled hot coffee on herself while drinking due to an improperly attached lid.

The plaintiff also alleged in the lawsuit that the restaurant employees refused to help her. According to Childress’ lawyer, they “didn’t give her the time of day.” The lawsuit alleged that the plaintiff was suffering from physical pains, emotional distress, and other damages. Also, it alleged that the restaurant’s negligence was a “substantial factor” for Childress’ injuries.

Peter Ou, the owner of the MCD drive-thru in San Francisco denied that the store manager and employees refused to help her. He said, “We take every customer complaint seriously and when Childress reported her experience to us later that day, our employees and management team spoke to her within a few minutes and offered assistance.”

“My restaurants have strict food safety protocols in place, including training crew to ensure lids on hot beverages are secure,” he added. He further stated that the company was reviewing this new legal claim in detail.

This latest lawsuit over spilled coffee might remind people of the much-talked-about hot coffee episode nearly thirty years ago where plaintiff Stella Liebeck suffered third-degree burns in her pelvic region when she accidentally spilled coffee on her lap while purchasing at an MCD restaurant. Liebeck had to undergo skin grafting and had to follow it up with two years of medical treatment.

Liebeck wanted $20,000 from MCD to settle the case, but the company refused to pay that amount. Instead, the company offered her $800, which was insufficient to cover her medical expenses. A suit was filed at the U.S. District Court for the District of New Mexico, accusing the company of gross negligence.

The jurors found that MCD’s coffee was 30 to 40 degrees hotter than what was served by other restaurants. The jurors also found that many people had gotten burnt before due to MCD’s hot coffee, but the company did not change its policy of keeping coffee between 180 - 190 degrees Fahrenheit.

According to a jury’s verdict in 1994, the victim was granted $200,000 in compensatory damages for her pain, suffering, and medical costs, but it was later reduced to $160,000 by the trial judge as they found her 20 percent responsible. She was also paid $2.7 million in punitive damages, which was reduced to $480,000. Later, the two warring parties settled for a confidential amount.

Earlier this year, MCD faced a lawsuit after a toddler received second-degree burns from a scalding hot chicken nugget dispensed at a Tamarac, Florida drive-thru restaurant. A Broward County jury found that MCD and franchise owner Upchurch Foods failed to warn or provide reasonable instructions over the harm that the hot McNuggets could possibly do.

The jury awarded the Florida family $800,000 for pain and suffering, disfigurement, mental anguish, inconvenience, and loss of capacity to enjoy life. Out of the $800,000, the jury determined that $400,000 is for the injuries sustained in the past and the rest for the damages that will be sustained in the future.

Going by the company’s history of dealing with similar lawsuits, I don’t see the recent ‘hot coffee’ lawsuit to have a material impact on MCD’s financials. Instead, here’s what could influence MCD’s performance in the upcoming months:

Robust Financials

MCD’s revenues from franchised restaurants increased 11.5% year-over-year to $3.93 billion for the second quarter ended June 30, 2023. Its total revenues increased 13.6% year-over-year to $6.50 billion. The company’s non-GAAP net income increased 22.7% year-over-year to $2.32 billion, and its non-GAAP EPS rose 24.3% year-over-year to $3.17.

Favorable Analyst Estimates

Analysts expect MCD’s EPS for fiscal 2023 and 2024 to increase 14.7% and 7.5% year-over-year to $11.59 and $12.45, respectively. Its fiscal 2023 and 2024 revenues are expected to increase 9.7% and 6.8% year-over-year to $25.42 billion and $27.14 billion, respectively.

High Profitability

In terms of the trailing-12-month gross profit margin, MCD’s 57.45% is 62.1% higher than the 35.45% industry average. Likewise, its 53.79% trailing-12-month EBITDA margin is 388.6% higher than the industry average of 11.01%. Furthermore, the stock’s 8.64% trailing-12-month Capex/Sales is 168.6% higher than the industry average of 3.22%.

Stretched Valuation

In terms of forward EV/EBITDA, MCD’s 17.80x is 91.6% higher than the 9.29x industry average. Likewise, its 9.58x forward EV/Sales is 749% higher than the 1.13x industry average. Its 23.28x forward non-GAAP P/E is 64.6% higher than the 14.15x industry average.

Solid Historical Growth

MCD’s EBIT grew at a CAGR of 15% over the past three years. Its EBITDA grew at a CAGR of 13.2% over the past three years. In addition, its EPS grew at a CAGR of 19.7% in the same time frame.

Bottom Line

MCD is no stranger to lawsuits as it had to pay $800,000 earlier this year due to the McNugget burn lawsuit. Moreover, this is not the first time MCD has faced a lawsuit over hot coffee. In the earlier cases, the victims had received third or second-degree burns, which are considered severe.

However, according to the lawyer of the current hot coffee spill case, the plaintiff wants her medical expenses to be paid for and is not looking for a payday. MCD is highly likely to get fined and will likely be asked by a jury to compensate the victim. This is unlikely to have any effect on MCD’s business prospects.

The company has bold expansion plans, likely to fuel its growth in the upcoming years. Therefore, despite its stretched valuation, it could be wise to buy the stock now, given its high profitability, robust financials, and solid historical growth.

Will McDonald's (MCD) Big Mac Controversy Drag the Stock Down?

Posted on by The INO.com Team

Fast food giant McDonald's Corporation (MCD) has been in the news for all the wrong reasons lately. Its popular Big Mac meal was at the center of the controversy after Twitter user Sam Learner shared a photo of McDonald’s Darien rest stop menu where a Big Mac meal was priced at $17.59, while a Quarter Pounder with cheese meal was $17.99.

Learner also provided the link to the rest stop’s GrubHub online delivery menu, where the prices quoted were even higher. A Big Mac meal would cost a customer $21.59 on GrubHub, while a Double Quarter Pounder with Cheese meal would cost $22.79. These exorbitant prices outraged other users as the meal, which is supposed to be easy on the pocket, is approaching a $20 price tag.

The outrage among customers is palpable as fast-food chains like MCD are popular for their low-priced offerings. However, the prices for MCD’s food items vary across America because 90% of its restaurants are independently owned and operated by franchisees, who can set their own prices. The average Big Mac costs $5.17 in 2023, while it costs $8.29 at the Darian rest stop. Since Learner’s post on Twitter, the stock has declined 0.7%.

MCD recently reported its second-quarter results, comprehensively beating the revenue and EPS estimates. Its revenue was $0.21 billion higher than analyst estimates, while its EPS beat the consensus estimate by $0.38. Its global comparable sales increased by 11.7%, while systemwide sales rose by 12%.

MCD President and CEO Chris Kempczinski said, “Our second quarter results reflect consistently strong execution of our Accelerating the Arches strategy, with global comparable sales growth of 11.7% and double-digit comparable sales growth across each of our segments.”

“While global macroeconomic challenges persist, we continue to invest in our growth drivers and our brand to meet the customer needs of tomorrow,” he added. The company plans to open 1,900 new locations this year, its most significant growth move since 2014.

The stock has gained 13.7% in price over the past nine months and 13.5% over the past year to close the last trading session at $291.75.
Here’s what could influence MCD’s performance in the upcoming months:

Robust Financials

MCD’s revenues from franchised restaurants increased 11.5% year-over-year to $3.93 billion for the second quarter ended June 30, 2023. Its total revenues increased 13.6% year-over-year to $6.50 billion. The company’s non-GAAP net income increased 22.7% year-over-year to $2.32 billion, and its non-GAAP EPS rose 24.3% year-over-year to $3.17.

Favorable Analyst Estimates

Analysts expect MCD’s EPS for fiscal 2023 and 2024 to increase 10.6% and 9.1% year-over-year to $11.17 and $12.19. Its revenue for fiscal 2023 and 2024 is expected to increase 8.4% and 6.7% year-over-year to $25.12 billion and $26.79 billion.

High Profitability

In terms of the trailing-12-month gross profit margin, MCD’s 57.53% is 63.2% higher than the 35.25% industry average. Likewise, its 53.45% trailing-12-month EBITDA margin is 390.5% higher than the industry average of 10.90%. Furthermore, the stock’s 8.55% trailing-12-month Capex/Sales is 163.7% higher than the industry average of 3.24%.

Stretched Valuation

In terms of forward EV/EBITDA, MCD’s 19.35x is 97.7% higher than the 9.78x industry average. Likewise, its 10.32x forward EV/S is 756.4% higher than the 1.21x industry average. Its 26.11x forward non-GAAP P/E is 67% higher than the 15.64x industry average.

Solid Historical Growth

MCD’s EBIT grew at a CAGR of 7.1% over the past three years. Its EBITDA grew at a CAGR of 6.7% over the past three years. In addition, its EPS grew at a CAGR of 6.8% in the same time frame.

Bottomline

Despite the uproar over the higher Big Mac prices, MCD’s stock has remained relatively stable as the prices of Big Mac vary from one location to the other. Higher prices at the Connecticut rest stop do not mean they have been priced higher elsewhere.

Despite the macroeconomic challenges, MCD reported solid growth in its top and bottom lines for the second quarter. The company has bold expansion plans, fueling its growth in the upcoming years.

Despite its stretched valuation, it could be wise to buy the stock now, given its high profitability, robust financials, and solid historical growth.