ii view: what to make of McDonald's sales shortfall?

Fourth-quarter results to 31 December

• Revenue up 8% to $6.41 billion
• Adjusted earnings up 14% to $2.95 per share 
• Quarterly dividend up 10% from the previous quarter to $1.67 per share

Chief executive Chris Kempczinski said:

“Strong execution of our Accelerating the Arches strategy has driven over 30% comparable sales growth since 2019 as our talented crew members, and the industry’s best franchisees and suppliers have demonstrated proven agility with a relentless focus on the customer. 

“By evolving the way we work across the System, we remain confident in the resilience of our business amid macro challenges that will persist in 2024."

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ii round-up:

Fast-food giant McDonald's Corp (NYSE:MCD) detailed quarterly sales that missed Wall Street forecasts, with the shortfall blamed on its Middle Eastern operations following Israel’s war with Hamas. 

Fourth-quarter sales at its International Developmental Markets segment which includes the Middle East rose by just 0.7% year-over-year, leaving overall group revenues up 8% at $6.41 billion, just shy of analyst estimates of $6.45 billion. 

Shares in the Dow Jones company fell by more than 3% in post results trading having gained almost 13% in 2023. That’s similar to the Dow index itself and ahead of a 3% retreat for coffee giant Starbucks Corp (NASDAQ:SBUX) last year. 

McDonald's operates in more than 40,000 locations in over 100 countries, with around 5% of its outlets located in the Middle East. 

Product discounts offered to Israeli military personnel by franchises located there had subsequently resulted in boycotts of its restaurants by Muslim populations. 

Earnings of $2.95 comfortably exceeded analyst forecasts for $2.82 per share, helped along by strategic menu price increases, cost savings and continued growth in customer digital ordering. 

For 2024, McDonald’s plans capital expenditure of up to $2.7 billion, with more than half earmarked for opening new restaurants, including around 1,000 in China. 

ii view:

Started in 1955 and headquartered in Chicago, McDonald’s today sells burgers, fries, and other items globally. Its International Operated division which includes the UK, Germany and Canada generates its biggest slug of sales at close to a half, followed by its home US market at around 40% and International Developmental Markets the balance of approximately 10%. 

Under its ‘Accelerating the Arches strategy’, it is looking to build on areas including delivery, digital sales and Drive-Thru. Its customer loyalty programme now operates in more than 50 markets. 

For investors, geopolitical tensions cannot be ignored, with sales affected by the company's withdrawal from Russia in 2022 following the invasion of Ukraine. Western tensions with China persist, costs for businesses generally remain elevated, while an estimated forward price/earnings (PE) ratio broadly matching the 10-year average suggests the shares may offer fair value. 

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On the upside, and despite some selected price increases, its value-based menu looks to remain highly attractive to cost pressured consumers. Management initiatives include accelerating the roll-out of new outlets, while a record of increasing the dividend payment annually since 1976 and a modest forecast yield of 2.2% (not guaranteed) are not to be overlooked.

For now, and while heightened geopolitical tensions give room for caution, fans of this iconic fast-food provider are likely to remain loyal given its market position and impressive record of long-term performance and returns.  

Positives: 

• Defensive value product offering
• Progressive dividend policy

Negatives:

• Cost pressures
• Subject to currency fluctuations 

The average rating of stock market analysts:

Buy