McDonald’s share price: Will value meals inspire a turnaround?

McDonald’s (MCD.N) recently reported its Q2 earnings, revealing a surprising decline in global sales, marking its first drop since the fourth quarter of 2020. As the fast-food giant faces mounting pressures from inflation and shifting consumer behaviours, the company’s strategic response, particularly its value meal promotions, will be crucial in navigating these challenges.

Earnings report highlights

• Earnings per Share (EPS): McDonald’s reported an adjusted EPS of $2.97, falling short of analysts’ expectations of $3.07.
• Revenue: The company posted $6.49 billion in revenue, slightly below the anticipated $6.61 billion but still marking a 1% increase from the previous year.
• Net Income: Net income stood at $2.02 billion, or $2.80 per share, down from $2.31 billion, or $3.15 per share, a year earlier.

McDonald’s sales slump and regional challenges

The quarter saw McDonald’s face significant challenges in its sales performance across various regions. Global comparable sales fell by 1%, a notable miss against the expected 0.5% growth. In the U.S., comparable sales decreased by 0.7%, a stark contrast to the robust 10.3% growth reported in the same quarter last year. This decline in the U.S. market is particularly concerning given the previous year’s success, largely attributed to popular promotions such as the Grimace Birthday Meal.

Internationally, McDonald’s also experienced a downturn. Sales in its international markets division dropped by 1.1%, with France emerging as a particularly weak spot. The company attributed part of this decline to increased pricing competition and consumer boycotts linked to the ongoing conflict in Gaza. Furthermore, sales in China and the Middle East, part of the company’s international developmental licensed markets, fell by 1.3%. This segment struggled with a slower-than-expected recovery in China and the adverse impacts of regional conflicts, which compounded the challenges in maintaining sales growth.

Strategic shifts and McDonald’s value meal strategy

Amidst these financial pressures, McDonald’s has leaned heavily on its value meal strategy to attract budget-conscious consumers. The $5 value meal promotion, launched in late June, has shown promising early results, prompting the company to extend the promotion beyond its initial four-week schedule into August.

Chris Kempczinski, McDonald’s CEO, highlighted the increasing trend of consumers becoming “very discriminating” due to economic pressures, stating, “Consumer sentiment in most of our major markets remains low.” This sentiment was echoed by Edward Jones analyst Brian Yarbrough, who noted a significant decline in visits from lower-income consumers, affecting overall sales.

Analyst perspectives on Mcdonald’s share price

Despite the challenges, analysts remain cautiously optimistic about McDonald’s. UBS analysts, while adjusting their price target from $335 to $305 due to inflation’s impact on Q2 earnings, maintain a “buy” rating, anticipating improved performance in the latter half of the year fueled by value promotions.”

Baird analysts also expressed confidence in McDonald’s value-focused advertising strategy, believing it will improve consumer perception and drive traffic back to stores. “History suggests McDonald’s can gain significant share when emphasising value-oriented price points with its substantial advertising budget,” the Baird analysts noted.

McDonald’s remains optimistic about its strategic shifts, maintaining its capital expenditure budget of up to $2.7 billion, with a significant portion allocated to opening new restaurants domestically and internationally. Brian Mulberry, client portfolio manager at Zacks Investment Management, is hopeful about the future, stating, “Even though things are soft now, they should be getting better in the back half of the year with better value on the menu.”

Technical outlook for Mcdonald’s stock price

At the time of writing, MCD is hovering around the $262 mark,  a level that has acted as resistance three times since early June. If the price breaks above this level, buyers could face a hurdle at the 100-EMA, around $270. On the downside, the $260 level serves as psychological support. If the price continues to decline, a more significant support level is likely around $254.  

Prices remain below the 100 EMA, indicating that sellers are present despite some recent strong green bars. However, the RSI is flat in a neutral zone, suggesting that selling pressure is gradually easing.

McDonald’s Q2 earnings impact

McDonald’s Q2 earnings report underscores the significant impact of inflation and changing consumer behaviours on its financial performance. The company’s strategic focus on value meals and selective price increases aims to counter these pressures and attract more customers. As McDonald’s navigates these turbulent times, its ability to adapt and innovate will be key to driving a turnaround in the coming quarters.

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