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McDonald's (MCD) Q2 Results Review: Time to Buy or Red Flag?
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McDonald's Corporation's (MCD - Free Report) second-quarter 2024 results disappointed investors, as revenues and earnings fell short of expectations. This marks a year-over-year decline in both key metrics. Despite these lackluster results, the stock has moved up 6.8% since the earnings release. Let's assess whether the gain is sustainable or short-lived.
Highlights From MCD’s Q2 Results
Lower-than-expected Results: In second-quarter 2024, MCD posted adjusted earnings per share (EPS) of $2.97, missing the Zacks Consensus Estimate of $3.08. Adjusted earnings decreased 6% year over year. Quarterly earnings missed the consensus estimate for the second straight quarter. Quarterly net revenues of $6,490 million lagged the consensus mark of $6,651 million. The top line dropped 0.1% year over year.
Dismal Comps Growth: In the second quarter, comps declined for the first time after increasing in 13 straight quarters. In the said quarter, global comps dropped 1% against a rise of 11.7% reported in the prior-year quarter. The company experienced negative comparable store sales in its international operated markets, reflecting broad-based pressure and more cautious spending by customers. Performance in France also contributed to this trend. In the IDL segment, positive comp sales in Latin America and Japan were offset by challenges from the ongoing war in the Middle East and reduced consumer confidence in China.
During the quarter, comps in the United States inched down 0.7% against 10.3% growth of the prior year. The downside was due to a decline in guest counts, though this was somewhat balanced by higher average checks thanks to strategic menu price increases. Comps in the international developmental licensed segment declined 1.3%.
High Costs: Inflation continues to put pressure on McDonald's margins. In the second quarter, the company's total operating costs and expenses rose to $3.57 billion, up 5% year over year. The challenging macroeconomic environment, including rising interest rates, adds to the company's difficulties. MCD anticipates that these inflationary pressures will keep denting its operating margins in the near term. While inflation for items like food and paper has eased to low single digits, labor costs remain elevated, especially in the United States, where labor inflation is expected to be in the high single digits for 2024.
Southbound Estimate Revisions
The Zacks Consensus Estimate for 2024 and 2025 have witnessed downward revisions in the past 30 days. This indicates that analysts are not optimistic about MCD’s earnings growth. In the past 30 days, earnings estimates for 2024 and 2025 have witnessed downward revisions of 3.6% and 4.2% to $11.71 and $12.64 per share. Earnings in 2024 are likely to witness a decline of 1.9%, whereas in 2025, it is expected to increase 7.9% year over year.
Image Source: Zacks Investment Research
Price Performance & Valuation
The Restaurant industry disappointed investors and MCD is no exception. Year to date, the stock has declined 9.2% compared with the industry’s 7.8% drop. Other industry players like Darden Restaurants, Inc. (DRI - Free Report) , down 13.7%, Starbucks Corporation (SBUX - Free Report) , down 21.6%, and Restaurant Brands International Inc. (QSR - Free Report) , down 9.7%.
Image Source: Zacks Investment Research
Let's assess the value MCD offers to investors at its current levels.
From the valuation point of view, the stock is trading at a discount. MCD’s forward 12-month price-to-earnings ratio stands at 21.96, lower than the industry’s ratio of 22.45 and the S&P 500's ratio of 21.71.
Image Source: Zacks Investment Research
Long-Term Growth Trajectory Remains Positive
The company’s focus on expansion efforts, loyalty program and menu innovation bodes well. The company believes that there is a huge opportunity to grow all its brands globally by expanding its presence in existing markets and entering new ones. Its expansion efforts continue to drive performance. Despite unfavorable scenarios, the company continues to expand its global footprint.
It is planning to open more than 2,100 new restaurants globally in 2024, including 500 openings in the United States and IOM segment and 1,600 (including nearly 1000 in China) inaugurations in the IDL market. The new unit growth aim for 2024 showcases about 4% contribution to new unit growth (net of closures). Also, MCD expects net restaurant unit expansion to contribute nearly 2% to 2024 systemwide sales growth. It targets to open 50,000 restaurants by 2027.
The company continues to excel in delivering a superior customer experience with notable operational improvements, improved service times and increased customer satisfaction across most major markets. The focus on core menu items enhanced kitchen execution, exemplified by the Best Burger initiative. In over 80% of markets, this training highlights fundamental standards and boosts taste and quality perceptions. It is on track to deploy Best Burger in nearly all markets by the end of 2026.
End Note
Despite McDonald's long-term growth prospects and strategic expansion efforts, the second-quarter 2024 results raise significant concerns. The company’s revenues and earnings fell short of expectations. A year-over-year decline in key metrics suggests that McDonald’s challenges are not merely short-term setbacks. Persistent inflationary pressures, particularly in labor costs, are squeezing margins, while global comparable sales are declining for the first time in several quarters.
The downward revision in earnings estimates for 2024 and 2025 signals that analysts are not optimistic about McDonald’s near-term growth. Furthermore, while McDonald's is trading at a slight discount relative to its industry peers, this valuation may not be enough to justify holding the stock in a portfolio.
Given these factors, investors may want to consider selling or avoiding the Zacks Rank #5 (Strong Sell) stock until there is clearer evidence of a turnaround in its financial performance and a more favorable macroeconomic environment.
Image: Bigstock
McDonald's (MCD) Q2 Results Review: Time to Buy or Red Flag?
McDonald's Corporation's (MCD - Free Report) second-quarter 2024 results disappointed investors, as revenues and earnings fell short of expectations. This marks a year-over-year decline in both key metrics. Despite these lackluster results, the stock has moved up 6.8% since the earnings release. Let's assess whether the gain is sustainable or short-lived.
Highlights From MCD’s Q2 Results
Lower-than-expected Results: In second-quarter 2024, MCD posted adjusted earnings per share (EPS) of $2.97, missing the Zacks Consensus Estimate of $3.08. Adjusted earnings decreased 6% year over year. Quarterly earnings missed the consensus estimate for the second straight quarter. Quarterly net revenues of $6,490 million lagged the consensus mark of $6,651 million. The top line dropped 0.1% year over year.
Dismal Comps Growth: In the second quarter, comps declined for the first time after increasing in 13 straight quarters. In the said quarter, global comps dropped 1% against a rise of 11.7% reported in the prior-year quarter. The company experienced negative comparable store sales in its international operated markets, reflecting broad-based pressure and more cautious spending by customers. Performance in France also contributed to this trend. In the IDL segment, positive comp sales in Latin America and Japan were offset by challenges from the ongoing war in the Middle East and reduced consumer confidence in China.
During the quarter, comps in the United States inched down 0.7% against 10.3% growth of the prior year. The downside was due to a decline in guest counts, though this was somewhat balanced by higher average checks thanks to strategic menu price increases. Comps in the international developmental licensed segment declined 1.3%.
High Costs: Inflation continues to put pressure on McDonald's margins. In the second quarter, the company's total operating costs and expenses rose to $3.57 billion, up 5% year over year. The challenging macroeconomic environment, including rising interest rates, adds to the company's difficulties. MCD anticipates that these inflationary pressures will keep denting its operating margins in the near term. While inflation for items like food and paper has eased to low single digits, labor costs remain elevated, especially in the United States, where labor inflation is expected to be in the high single digits for 2024.
Southbound Estimate Revisions
The Zacks Consensus Estimate for 2024 and 2025 have witnessed downward revisions in the past 30 days. This indicates that analysts are not optimistic about MCD’s earnings growth. In the past 30 days, earnings estimates for 2024 and 2025 have witnessed downward revisions of 3.6% and 4.2% to $11.71 and $12.64 per share. Earnings in 2024 are likely to witness a decline of 1.9%, whereas in 2025, it is expected to increase 7.9% year over year.
Image Source: Zacks Investment Research
Price Performance & Valuation
The Restaurant industry disappointed investors and MCD is no exception. Year to date, the stock has declined 9.2% compared with the industry’s 7.8% drop. Other industry players like Darden Restaurants, Inc. (DRI - Free Report) , down 13.7%, Starbucks Corporation (SBUX - Free Report) , down 21.6%, and Restaurant Brands International Inc. (QSR - Free Report) , down 9.7%.
Image Source: Zacks Investment Research
Let's assess the value MCD offers to investors at its current levels.
From the valuation point of view, the stock is trading at a discount. MCD’s forward 12-month price-to-earnings ratio stands at 21.96, lower than the industry’s ratio of 22.45 and the S&P 500's ratio of 21.71.
Image Source: Zacks Investment Research
Long-Term Growth Trajectory Remains Positive
The company’s focus on expansion efforts, loyalty program and menu innovation bodes well. The company believes that there is a huge opportunity to grow all its brands globally by expanding its presence in existing markets and entering new ones. Its expansion efforts continue to drive performance. Despite unfavorable scenarios, the company continues to expand its global footprint.
It is planning to open more than 2,100 new restaurants globally in 2024, including 500 openings in the United States and IOM segment and 1,600 (including nearly 1000 in China) inaugurations in the IDL market. The new unit growth aim for 2024 showcases about 4% contribution to new unit growth (net of closures). Also, MCD expects net restaurant unit expansion to contribute nearly 2% to 2024 systemwide sales growth. It targets to open 50,000 restaurants by 2027.
The company continues to excel in delivering a superior customer experience with notable operational improvements, improved service times and increased customer satisfaction across most major markets. The focus on core menu items enhanced kitchen execution, exemplified by the Best Burger initiative. In over 80% of markets, this training highlights fundamental standards and boosts taste and quality perceptions. It is on track to deploy Best Burger in nearly all markets by the end of 2026.
End Note
Despite McDonald's long-term growth prospects and strategic expansion efforts, the second-quarter 2024 results raise significant concerns. The company’s revenues and earnings fell short of expectations. A year-over-year decline in key metrics suggests that McDonald’s challenges are not merely short-term setbacks. Persistent inflationary pressures, particularly in labor costs, are squeezing margins, while global comparable sales are declining for the first time in several quarters.
The downward revision in earnings estimates for 2024 and 2025 signals that analysts are not optimistic about McDonald’s near-term growth. Furthermore, while McDonald's is trading at a slight discount relative to its industry peers, this valuation may not be enough to justify holding the stock in a portfolio.
Given these factors, investors may want to consider selling or avoiding the Zacks Rank #5 (Strong Sell) stock until there is clearer evidence of a turnaround in its financial performance and a more favorable macroeconomic environment.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.