The Blubber

McDonald's, $MCD, reported a surprise drop in sales worldwide, its first decline in 13 quarters.

McDonald's reported a surprising decline in global sales on Monday, marking its first drop in 13 quarters. The decrease is attributed to cost-conscious consumers avoiding higher-priced menu items, such as Big Macs. Persistent inflation has driven lower-income consumers to opt for more affordable food options at home, leading fast food chains like McDonald's, Burger King, Wendy's, and Taco Bell to rely on value meals to attract customers.

Despite the company's shares dropping 15% this year, they rose nearly 4% after executives noted that the $5 meal deal, launched in late June, exceeded expectations. The company is working with franchisees to potentially extend the promotion beyond August. McDonald's, which maintains its 2024 operating margin forecast in the mid-to-high 40% range, stated that it would be more selective with price increases to maintain profitability.

Brian Mulberry, client portfolio manager at Zacks Investment Management, commented that while customer traffic is currently soft, it is expected to improve in the latter half of the year with better value offerings on the menu. Global comparable sales fell by 1% in the second quarter, contrary to the expected 0.5% increase, although overall revenue rose by 1%.

CEO Chris Kempczinski noted that consumers are increasingly looking for deals and are becoming "very discriminating." He mentioned that consumer sentiment remains low in most major markets.

These results align with recent comments from Coca-Cola CEO James Quincey, who observed "some softness in away-from-home channels" in North America, indicating fewer people are dining out. Edward Jones analyst Brian Yarbrough pointed out that the biggest impact for McDonald's is the significant reduction in visits from low-income consumers, which more than offsets the usual downturn McDonald's experiences during tougher economic times.