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Price increases helped McDonald’s beat third-quarter estimates, the company said. But customers may not be willing to put up with higher prices for much longer.
On Monday, McDonald’s (ticker: MCD) reported adjusted earnings of $3.19 a share, topping analyst estimates for $3, according to FactSet. Revenue of $6.69 billion rose 14% from a year ago, and came in ahead of forecasts of $6.56 billion.
The company also slightly boosted its outlook for adjusted operating margin to 47% from 46%, even as executives said they expected selling, general, and administrative expenses to be slightly higher than expected toward the end of the year.
Comparable sales in the U.S. rose 8.1%, benefiting from “strategic menu price increases,” the company said.
McDonald’s U.K. operations led the international market, which had a 8.3% gain. The company estimates that U.S. average menu prices will be just over 10% higher by the end of fiscal 2023, compared with the same period a year ago.
Marketing and delivery growth, among other factors, also helped propel the growth, McDonald’s said.
In early trading, the stock was up 1% to $258.82, coming down from a premarket surge of about 3%. Investors were considering just how long McDonald’s will be able to keep charging more, after the company said the rate of price increases had slowed across its U.S. business in the third quarter.
“We’re going to continue to see moderation in that top line as inflation levels continue to come down and obviously pricing comes down in line with that,” said Ian Borden, chief financial officer, on a call with investors.
Foot traffic also dipped, executives said, especially among low-income consumers. Market share gains among middle- and high-income clients, who are looking to stretch their budgets further, didn’t offset the traffic declines.
“It appears traffic has moved back to negative in the US segment perhaps a quarter sooner than many investors anticipated,” wrote Citi analyst Jon Tower in a note to clients. Tower has a Neutral rating on the stock and a $283 price target.
CEO Chris Kempczinski said customers were being more discriminating about how they spend their money. McDonald’s, however, has proven “time and time again” that the company’s focus on value is an opportunity for growth, he added.
Indeed, McDonald’s had beat earnings and sales expectations in the second quarter as well. The company attributed the beat to menu-price increases and higher-income consumers trading down from more-expensive dining options as discretionary spending remains limited.
Write to Karishma Vanjani at [email protected].
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