Restaurant stocks fall after McDonald's warns lower-income consumers are pushing back on high prices

McDonald’s (NYSE:MCD) suffered a blow after reporting Q4 earnings early on Monday, triggering its most significant drop in over a year. The company is bracing for a relatively modest growth rate of 3% to 4% in comparable store sales this year, reflecting a notable slowdown from the post-COVID surge.

As McDonald’s (MCD) CEO Chris Kempczinski cautioned, the specter of 2024 looms, resembling pre-COVID times. The company anticipates operating margins for 2024 to echo 2023, despite grappling with sagging sales in the Middle East and France in the wake of the Israel war.

Looking forward, Kempczinski underscored the struggle with low-income consumers, emphasizing affordability as a vital factor in luring them into the establishments, rather than value messaging. He voiced confidence in the chain’s ability to target this segment through the Dollar 1, 2, 3 platform. CFO Ian Borden echoed this sentiment, emphasizing consumer wariness towards pricing and implying that pricing decisions must adapt to this new reality to remain competitive.

On Wall Street, Citi analyst Jon Tower acknowledged the anticipated turbulence for McDonald’s but cautioned that the weaker global sales could reverberate negatively across the sector, impacting competitors with a significant global presence such as Restaurant Brands International (QSR), Domino’s Pizza (DPZ), and YUM! Brands (YUM). TD Cowen analyst Andrew Charles hailed McDonald’s 2024 margin outlook while Bank of America highlighted the efficiency of McDonald’s Accelerating the Arches initiative in offsetting franchise margin weaknesses.

McDonald’s (MCD) share prices tumbled by 3.69% in late morning trading on Monday. The downward spiral extended to other restaurant stocks, including Cracker Barrel Old Country Stores (CBRL) with a decline of -4.23%, Red Robin Gourmet Burgers (RRGB) sinking by -4.15%, and Shake Shack (SHAK) shedding -4.02%. The domino effect reached One Group Hospitality (STKS) down -3.52%, Jack in the Box (JACK) losing -3.25%, and Portillo’s (PTLO) sliding -3.04%. Dine Brands Global (DIN) and El Pollo Loco (LOCO) both experienced a -3.00% drop, while Denny’s (DENN) fell by -2.95%, and Brinker International (EAT) took a -2.30% hit. Texas Roadhouse (TXRH) and Yum Brands (YUM) also joined the downward trend, with losses of -2.25% and -1.60% respectively. Wingstop (WING) saw a decline of -1.46%.

The sector-wide snapshot was bleak, with the AdvisorShares Restaurant ETF (EATZ) registering a 1.25% decline at 11:28 a.m.