McDonald’s Focuses on Value as Inflation Pressures Fast-Food Prices
After grappling with significant inflation that raised prices for quick-service restaurants, McDonald’s (NYSE: MCD) is shifting its strategy by emphasizing value meals. During its recent fourth-quarter earnings call, the company mentioned “value” or “affordable” over 50 times, indicating a strong commitment to attracting budget-conscious customers.
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Rebuilding Trust After the E. Coli Scare
The fourth-quarter results for McDonald’s were less impressive overall. Early in the quarter, an E. coli scare prompted the company to temporarily remove its popular Quarter Pounder hamburgers from several locations. This resulted in significant customer traffic declines, especially in affected U.S. states. Fortunately, after identifying the outbreak’s source—sliced onions—the Centers for Disease Control and Prevention (CDC) declared it over by early December.
Sales hit their lowest point in early November but began to recover afterward. U.S. same-store sales fell by 1.4% during the quarter, which could have been much worse given the circumstances. The company noted a decrease in check size but observed a slight increase in guest count.
On the international front, results were far more positive. Comparable-store sales for licensed international markets increased by 4.1%, driven largely by success in Japan and the Middle East. Conversely, same-store sales for company-operated international locations rose just 0.1%, hindered by challenges in the U.K.
In total, global same-store sales grew by 0.4%, surpassing analyst predictions of a 1% decline. Revenue remained stable at $6.39 billion, slightly below the $6.44 billion consensus forecast from analysts. Adjusted earnings per share (EPS) decreased by 4% to $2.83, which met analyst expectations.
Growth Plans and Value Initiatives
Looking forward, McDonald’s plans to invest between $3 billion and $3.2 billion this year to open about 2,200 new restaurants by 2025, with 25% of those in the U.S. In particular, the company is aiming for 1,000 new locations in China. Overall, it anticipates a unit growth of just over 4%, resulting in a net addition of 1,800 locations.
Expectations are also high for adjusted operating margins, which should exceed the 46.3% seen in 2024. However, the company does anticipate a currency hit that could reduce EPS by $0.20 to $0.30.
McDonald’s is placing a strong emphasis on value this year, having launched its McValue platform in January in the U.S. International markets will also see enhancements to value programs. In parts of Europe, improvements in value perception have been noted with the 4-euro Happy Meal, while the $5 Meal Deal has resonated well with shoppers.
Regarding the impact on gross margins, the new deals appear to be encouraging additional purchases. The average check for the $5 Meal Deals has been over $10. Additionally, the Buy 1 Add 1 for $1 deal has contributed positively to overall sales transactions.
McDonald’s anticipates a full sales recovery from the E. coli scare by the start of the second quarter. Moreover, the company expects to see improved margins compared to 2024. There are also plans for new menu innovations and a continued rollout of its Best Burger initiative, which is set to be implemented in all operating regions by the end of 2026. This initiative involves slight modifications to burger preparation, yielding better customer satisfaction scores.
Image source: Getty Images.
Is It Time to Invest in McDonald’s Stock?
McDonald’s has navigated the challenges posed by the E. coli scare effectively, minimizing the impact on its sales. Although some effects may linger into the first quarter, the company’s recovery is projected to be swift.
With its renewed focus on value in a market where customers are sensitive to pricing, McDonald’s is poised to increase its market share during this price competition. The strategy of offering value meals alongside new menu items typically enhances traffic while encouraging additional full-priced purchases.
Digital ordering is also a key area of expansion, helping to enhance the loyalty program with personalized offers. At the end of 2024, the company reported having 175 million active loyalty members.
From a valuation standpoint, McDonald’s trades at a forward price-to-earnings (P/E) ratio of just under 25 times 2025 analyst predictions, consistent with its historical valuations.
MCD PE Ratio (Forward) data by YCharts.
Overall, McDonald’s shows potential as a strong long-term investment. The iconic brand continues to have opportunities for expansion and growth through digital ordering, loyalty initiatives, and a focus on affordable options.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
