McDonald’s set for weak sales growth as US fast-food chains grapple with muted traffic

McDonald’s (MCD.N) is set to report a sequential drop in sales growth for the fourth straight quarter as low-income consumers remain hesitant about eating out even as fast-food chains battle to lure them with value menu items.

The burger giant will report first-quarter results on Tuesday, kicking off earnings for US restaurant chains, with top players such as Starbucks (SBUX.O) and KFC-parent Yum Brands (YUM.N) set to report results later in the week.

“We expect traffic to continue to be negative and believe the average check will remain under pressure from the heavy discounting to recover lower-income consumer traffic,” BTIG analyst Peter Saleh said.

McDonald’s has leaned on its Dollar Menu, offering items in the $1, $2, $3 price points to lure in diners on a budget, while Wendy’s this month offered some items for just a dollar on orders placed via apps. Taco Bell also launched a new Cravings Value Menu for some burritos and tacos at $3 or less in January.

THE CONTEXT

After a slow start to the year at McDonald’s owing to inclement weather in January and choppy spending due to still-high inflation, Wall Street analysts believe discounting could be a theme for the rest of the year at the food joints.

Visits to McDonald’s rose 2.4 per cent in the January to March period, Taco Bell saw a 3.8 per cent jump and Chipotle a 10 per cent increase, data from Placer.ai showed.

McDonald’s is also expected to continue to see sales drag from its International Developmental Licensed Markets segment, which has been hurt by the Israel-Hamas conflict and weak demand in China.

At least five brokerages have trimmed their price target on the company’s stock so far in April.

THE FUNDAMENTALS

** McDonald’s is expected to show a 2.36 per cent rise in global same-store sales when it reports first-quarter results on Tuesday, while earnings per share (EPS) is expected to come in at $2.72.

** A day later, Yum Brands is expected to post a 0.34 per cent increase in worldwide same-store sales for the first quarter, compared with a rise of 1 per cent in the fourth quarter and up 8 per cent last year. First-quarter EPS is expected to rise to $1.20.

WALL STREET SENTIMENT

** McDonald’s shares have lost nearly 8 per cent year-to-date, roughly similar to Starbucks, while Chipotle has surged about 40 per cent. Yum Brands and Wendy’s are up about 8.5 per cent and 3.4 per cent, respectively.

** The S&P 500 Restaurants index (.SPLRCREST) is up 0.88 per cent in the same period, underperforming a nearly 7 per cent jump in the benchmark S&P 500 (.SPX).

** McDonald’s has an average rating of “buy”, with 38 analysts covering the stock, their median price target is $325, according to LSEG data.

** Yum Brands has a current average rating of “hold”, with 29 analysts covering the stock, and a median price target of $145.04.