On January 31, McDonald’s became the first of the major global restaurant chains to report fourth quarter earnings for 2022. On the face of it, with earnings better than consensus forecasts, the report was favorable. But the shares closed down 1.29% on the day of the release, having traded at as much as 2% down during the regular trading session. Why the red day?
Here are the six nuggets we took away from the Q4 2022 earnings call.
1. Cash-Strapped Consumers Are Hungry for Fast Food
McDonald’s (stock symbol MCD) raised its prices through 2022 in response to rising raw material and labor costs. But this didn’t put off the consumer. Cash-strapped consumers are clamoring for Big Macs, Fries, and Happy Meals – and the flagship Big Mac is still seen as a great deal at around $5.40.
On the earnings call, CEO Chris Kempczinski said that consumers are spending less but visiting more often – a reaction to higher prices. This quarter saw the launch of the new Cactus Plant Flea Market Box. It might be a mouthful – and the adult version of the iconic Happy Meal certainly is, with either a Big Mac or 10 McNuggets, a side of fries and a drink..
Speaking about consumer patterns, Kempczinski said:
“Overall, the consumer, whether it’s in Europe or the U.S., is actually holding up better than what I would have expected a year ago or 6 months ago.”
2. The Proof of the Pudding is in the Earnings
Fourth quarter earnings were nearly as hot as the fabled McDonald’s Apple Pie. Adjusted earnings beat consensus forecasts at $2.59 per share, up by 16% from $2.23 in Q4 2021.
MacDonald’s earnings have been beating forecasts throughout every quarter in 2022.
3. Franchisees are Feeding the Bottom Line
Sales at both company-operated stores and franchised units increased in Q4 from Q3. That’s a major uptick for company-operated stores, and a continuation of growth in revenues posted from franchised restaurants, which came in at $3.65 billion: around 62% of the company’s gross revenue for the quarter. That’s a great advertisement for its business model and Accelerating the Arches strategy.
4. Top Line Revenue Didn’t Grow
Here’s where the heat started to dissolve from the Q4 earnings serving. Though the consumer kept coming, and digital sales grew to 35% of systemwide sales, top-line revenues failed to grow.
Comparable store sales may have improved by more than 10%, but global revenues fell 1% short of Q4 2021. This is explained by the impact of the stronger dollar.
5. Higher Costs Could be Challenging to Stomach in 2023
Operating margins dipped to 43.6% as commodity inflation, higher labor and energy costs, as well as currency fluctuations bit into revenues. And this may not improve in 2023.
CFO Ian Borden said, “We anticipate macro-related pressures will continue to weigh on both our consumers and our business.” The company is forecasting that operating margin will be around 45% in 2023 – and that’s below where analysts had expected (46.5%)
MCD also expects that it will incur costs of up to $150 million to support franchisees who have seen their cashflows damaged by inflation.
6. And Capital Expenditure Could Bite Into Earnings in 2023
MCD has forecast capital expenditure of as much as $2.4 billion in 2023. This includes a huge program of restaurant growth, with plans to build 1,900 new units worldwide. These plans include MCD’s first major U.S. expansion in eight years.
Needless to say, this massive spending will more than nibble away at margins, and could pressure earnings in a year that MCD management expect to be negatively impacted by macroeconomic uncertainty.
Should Investors Have an Appetite for MCD?
MCD’s brand recognition cannot be denied. In a tough climate, it has managed to increase prices and improve its bottom line. The cost-of-living crisis is influencing consumers, and many are choosing to make MCD their treat of choice.
Chris Kempczinski summed up the outlook for 2023 as follows:
“While we expect short-term inflationary pressures to continue in 2023, we remain highly confident in Accelerating the Arches, which now includes a greater emphasis on new restaurant openings. The recently announced Accelerating the Organization initiative will complement this strategy to enable the McDonald’s system to be faster, more innovative, and more efficient. We’re proud of our continued strong performance, but we’re not satisfied.”
MCD is positioning itself to grab market share in 2024 and beyond. MCD has a current dividend yield of 2.23% and a payout ratio of around 70%. With the shares trading near all-time highs, investors might see better buying opportunities in the coming months.