With inflation running at levels not seen in decades, consumer dollars are limited. One way to conserve capital is to trade down to a lower price point for goods or services.
This appears to be what is going on in the case of McDonald’s Corp. (MCD, Financial), which just posted impressive comparable sales growth even as the company has raised menu prices.
Earnings highlights
McDonald’s reported second-quarter earnings results on July 26. Revenue fell 2.9% to $5.72 billion, which was $93 million less than Wall Street analysts had anticipated. In constant currency, the top line grew 3%. Adjusted net income of $1.89 billion, or $2.55 per share, compared favorably to adjusted net income of $1.78 billion, or $2.37 per share, in the prior-year quarter. Adjusted earnings per share were 8 cents better than expected.
Comparable sales increased 9.7% with gains seen in all regions. The U.S. was up 3.7% as the company has leveraged its digital offerings to help drive traffic to stores. Price increases made on certain items aided results as well. International Operated Markets grew 13%, with particular strength seen in France and Germany. International Development Licensed markets were higher by 16% as gains in Brazil and Japan more than offset weakness in China due to Covid-19 restrictions.
Wrapping up the quarter, total expenses increased 25% to just over $4 billion and the company took a $1.2 billion pretax charge related for the selling of its locations in Russia following that country’s invasion of Ukraine.
According to Yahoo Finance, analysts expect McDonald’s will earn $9.88 in 2022, which would be a 6.5% improvement from the prior year. For context, the company’s earnings per share have a compound annual growth rate of 6.3% for the 2012 to 2021 period.
Takeaways
Revenue did decline year over year, but this was primarily a result of a strong U.S. dollar. Currency exchange rates were a 6% headwind to results for McDonald’s. Currency reduced adjusted earnings per share by 16 cents, twice what the company had anticipated at the timing of the first quarter. Despite a large uptick in expenses, the company still produced solid adjusted net income and earnings per share growth.
Comparable sales were impressive considering how good results were in the second quarter of 2021. Recall that the company and world were coming off a weak 2020 due to Covid-19. Comparable sales for International Operated Markets, International Development Licensed Markets and the U.S. were 75.1%, 32.3% and 25.9%, respectively, in the same period last year. McDonald’s did not have an easy comparison in the second quarter of 2021, but was still able to deliver the results that it did in the most recent quarter.
Even going back to the worst of the Covid-19 pandemic in 2020, the three-year comparable stack growth rate is 26.3% for the company, 20.9% for the U.S., 46.7% for International Operated Markets and 24.1% for International Development Licensed Markets.
Most regions saw improvement in year-over-year sales as value continues to be a hallmark of McDonald’s business. Even with price increases, consumer spending at locations does not appear to be wanning. Guest counts in the U.S. were flat as average check size led to revenue gains. Leadership stated on the conference call that guest counts in most countries is close to pre-pandemic levels.
Also helping keeping customers coming to restaurants is that McDonald’s price increases are not being implemented all at once. Price increases have been more frequent, but smaller in size, making the impact more manageable.
McDonald’s use of its digital channel, which includes the mobile app, delivery and kiosk, has really proven fruitful for the company and was a major reason why guest counts remained stable. Digital sales in the top six markets crossed the $6 billion threshold for the first time in the quarter and contributed almost a third of total systemwide sales for the period.
The company’s loyalty program has also helped keep traffic high with McDonald’s top 50 markets now having loyalty programs. The U.S. alone has close to 22 million members. Management stated the rewards program has resulted in more frequent trips and higher average tickets.
Final thoughts
The second quarter was mixed for McDonald’s, but this was mostly due to the negative impact of currency exchange. Comparable sales were very strong and only added to the gains the company has seen over the last two years. McDonald’s is also comfortably ahead of where it was prior to the pandemic.
Even with currency exchange acting as a significant challenge, McDonald’s is still expected to grow earnings by a rate just ahead of its long-term average.
And yet, shares are trading very close to their intrinsic value according to the GF Value chart.
With a share price of close to $253 and a GF Value of $252.81, McDonald’s has a price-to-GF Value ratio of 1.04. The stock receives a rating of fairly valued from GuruFocus.
The most recent quarter speaks to McDonald’s ability to resonate with consumers who are looking for value. Combining this with a reasonable valuation and the company’s nearly five decades of dividend growth suggest shares of McDonald’s deserve investors' consideration.
