McDonald's Reports Earnings Amidst Inflation Concerns

When McDonald’s reports earnings Monday morning, investors will examine whether inflation continues to weigh on the frequency of customer visits and how much they spend at the fast-food chain.

Strong Revenue Growth Expected

For the three months ended in December, analysts polled by FactSet expect McDonald’s to post $6.4 billion in revenue, up 8.8% from the year-ago period. Much of that growth would likely come from international markets as the company opens up more locations.

Moderate Increase in Same-store Sales

Same-store sales are expected to increase 4.7% in the fourth quarter from a year ago, a more moderate pace compared with previous quarters as inflation eased toward the end of 2023.

Rise in Net Income and Earnings

Analysts expect net income to come in at $2 billion for the period, which translates to earnings of $2.83 per share. That would be 8.3% higher than a year ago.

Future Growth Prospects

There will likely be more growth going forward. In December, McDonald’s announced ambitious plans to open nearly 10,000 new restaurants in the next four years, pushing the total number of stores around the globe to 50,000 by the end of 2027.

The fast food giant aims to grow its loyalty program’s active users to 250 million by 2027 from the current 150 million—and more than double the program’s sales to $45 billion a year by then as well. Other initiatives include scaling up its delivery, drive-through, and mobile-order businesses, as well as improving its core menu items.

Expansion into Beverage Market

McDonald’s also launched a new drink-focused chain called CosMc’s to take on Starbucks and Dunkin’ in the afternoon beverage market. If successful, the move would be another growth engine for the fast-food chain. But investors shouldn’t expect to see any material impact in the near term.

McDonald's Expects Sales Growth and Increased Capital Spending

In McDonald's latest guidance for fiscal 2024, the company expects sales to grow by nearly 2% in constant currency. Additionally, the operating margin is expected to remain at the same level as in 2023, ranging from mid-to-high 40%. McDonald's plans to invest $2.5 billion in capital expenditure, representing a 30% increase from fiscal 2022.

Looking beyond 2024, McDonald's projects an annual systemwide sales growth of approximately 2.5%. The number of restaurants is also expected to increase by 4% to 5% each year. As part of their long-term plans, the company anticipates increasing capital spending by $300 million to $500 million annually through 2027.

While these growth prospects are promising, investors are keeping a close eye on the impact of inflation on consumer demand, particularly within the domestic market. During the third quarter of 2023, foot traffic at McDonald's U.S. restaurants declined for the first time. CEO Chris Kempczinski noted that both middle- and higher-income customers opted for more affordable options, while lower-income consumers made fewer visits.

However, despite these challenges, McDonald's U.S. stores experienced an 8% increase in comparable sales during the same period. This growth was primarily driven by price increases. Nevertheless, CFO Ian Borden stated that sales growth is expected to moderate as inflation levels decrease.

During the third quarter, McDonald's reported a 14% year-on-year increase in total sales, attributed partially to the addition of over 1,000 new restaurants. The company also saw a boost in growth from increased delivery orders.

On Wall Street, around 75% of analysts surveyed by FactSet have a Buy rating for McDonald's stock. The average target price is $324, indicating a potential 10% gain from current levels. Over the past year, McDonald's stock has risen approximately 12%, closing at $297.05 on Friday.