McDonald's Q1 earnings miss sales expectations, as consumers tighten their wallets

McDonald's (MCD) customers may be thinking twice before grabbing a Big Mac and fries.

The chain posted Q1 results that missed revenue growth and same-store sales estimates across its segments, while its earnings also came below expectations.

"Consumers continue to be even more discriminating with every dollar that they spend as they faced elevated prices in their day-to-day spending, which is putting pressure on the QSR industry," CEO Chris Kempczinski said during a call with investors.

The fast food giant posted revenue of $6.17 billion, up 4% year over year and slightly higher than Wall Street estimates of $6.15 billion. Adjusted earnings per share is up 2% to $2.70, below expectations of $2.72.

Global same-store sales growth was 1.9% year over year, compared to the 2.33% jump that Wall Street was hoping for. That's also far lower than the 12.6% increase seen in 2023 Q1.

Kempczinski added that industry traffic was flat to declining in the U.S., Australia, Canada, Germany, Japan and the U.K. Across almost all major markets, foot traffic is slowing against a "difficult macro environment," where consumers are seeking value.

McDonald's US same store sales were up 2.5%, slightly off from the 2.55% expected. Higher menu prices boosted the average check size, while marketing campaigns and growth in digital and delivery helped bolster sales.

In international markets where McDonald's operates its own stores, same store sales were up 2.7%, compared to the 12.6% growth seen a year ago.

Select international markets where McDonald's operate via franchisees, like Europe, Latin America, and Asia, saw positive sales growth. But overall same store sales for the segment fell 0.2%, due to "the continued impact of the war in the Middle East."

In early January, CEO Chris Kempczinski wrote in a LinkedIn post that "several markets in the Middle East and some outside the region are experiencing a meaningful business impact due to the war and associated misinformation that is affecting brands like McDonald’s."

The company's loyalty program played a key role in its performance. As consumers look for value and deals, loyalty members brought in $6 billion in digital sales across 50 markets during Q1, and $25 billion for the past 12 months.

Shares of the fast food giant have been under pressure, dropping 9% year to date compared to the S&P 500's (^GSPC) 8.5% gain.

Prior to the release, Deutsche Bank research analyst Lauren Silberman said that while there are near term issues, "concerns on McDonald's global strength and value leadership are overblown" in a client note.

She continues "to see the brand as well positioned for outperformance over time, particularly in a more challenging consumer backdrop."

This comes as the competition is heating up, with Wendy's (WEN), Burger King (QSR), and Taco Bell (YUM) vying for market share with promotional activity.

Citi analyst Jon Tower identified the bull and bear case for the Golden Arches in a recent note.

For the bull case, he said the company has a "precedent for ... leaning into value to drive step function gains in share in softer macro backdrops, and digital relationships offer a new avenue for pursuing these goals."

As for the bear case, McDonald's value isn't what it once was.

"Wage increases and the associated price have fundamentally broken the consumer’s value-relationship with quick service restaurants, convenience stores offer an increasingly competitive alternative at lower price points, and California wage increases are an additional wrench in getting franchisees broadly on board with a national value offer," Tower wrote.

Kempczinski highlighted McDonald's digital promotions, like buy one Big Mac, get one for $0.29, but pointed out the need to drive better awareness of the chain's value.

Experts told Yahoo Finance the sheer scale of McDonald's, and other large chains, can help insulate them from recent legislation in California that raised the minimum wage for most fast food establishments to $20.

Kempczinski said the company is expecting high single digit labor inflation on a national level, with "much of that from the bleed over of what California introduced."

Here's what McDonald's reported compared to Wall Street estimates, per Bloomberg:

• Revenue: $6.17 billion versus $6.15 billion

• Adjusted earnings per share: $2.70 versus $2.72

• Global same-store sales growth: 1.9% versus 2.33%

• US same-store sales growth: 2.5% versus 2.55%

• International owned same-store sales growth: 2.7% versus 3.20%

• International franchised same-store sales growth: -0.2% versus +1.17%

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

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