McDonald's reported higher-than-expected earnings for the quarter, although sales growth was down in its biggest market, dampening investor confidence. LSEG estimates the fast-food giant has seen 0.8% sales rise in the US's comparable segment, which was below analysts' forecasts of 1.06%. The lower performance reflects on the ongoing pressure on lower-income consumers' spending despite the company's aggressive value focused promotions.
The slow growth was also a stark drop from the 2.5% comparable sales rise in the same quarter last year, which saw the company's sales driven by promotions for "A Minecraft Movie".
In April, McDonald's beefed up its McValue brand with a new under-$3 menu option and a breakfast meal deal for $4, offering a more budget-friendly range of choices to appeal to consumers. However, executives admitted that the effort resulted in fewer extra customers.
The inflation at retail for everyday products and fuel has dampened discretionary spending among lower income shoppers, a critical customer base for McDonald's, Reuters reports.
"We don't have a strategy problem, we simply didn't execute at the level we needed to in the second quarter," Kempczinski said during the earnings call.
He also said that a lack of promotion of value offers and the smaller trend of digital discounts, such as its buy-one-add-one promotion, lowered visits from loyal customers who made up nearly two-thirds of the traffic deficit in the quarter.
McDonald's revenue growth was still modest, but the profitability beat Wall Street estimates. The company's net income was $2.36 billion, or $3.32 per share, compared with $2.25 billion, or $3.14 per share, a year ago.
Analysts had forecast earnings of $3.32, but FactSet had it at $3.38 on the adjusted basis. Revenue rose 7 per cent to $7.1 billion, which was marginally lower than the market had expected, but was up from $6.84 billion last year.
The growth in comparable sales was 1.3%, down from 3.8% a year ago, and growth in internationally operated markets was 1.5%, off 4% a year ago.
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McDonald's has hired Skye Anderson to replace Joe Erlinger as President of McDonald's USA to boost the company's presence in the United States. The management reshuffle is an effort to drive faster sales growth and execution, according to Citi analysts.
The McDonald's beverage program performed well, offsetting a decline in the average customer spend, but the company is seeing more competition from other fast food chains, convenience stores and homemade meals. Investors will be spending the next few years looking to see if the improved execution, greater value proposition and new management can help the chain's biggest market regain momentum.