McDonald’s (MCD) 2022 Q1 Earnings Beat Estimates

McDonald’s on Thursday reported higher-than-expected earnings and earnings, helped by rising US prices and strong growth in international sales.

But the war in Ukraine and inflation in the fast food giant’s domestic market weighed heavily on its quarterly report. CEO Chris Kempczynski said the conflict has not yet affected consumer behavior in the rest of Europe, but some U.S. consumers are cutting back on their orders or buying cheaper items.

The company’s shares rose more than 1% in premarket trading.

Here’s what the company said compared to what Wall Street expected, based on a survey of analysts at Refinitiv:

  • Earnings per share: $2.28 adjusted vs. $2.17 expected.
  • Revenue: $5.67 billion vs. $5.59 billion expected

The fast food giant reported first-quarter net income of $1.1 billion, or $1.48 per share, up from $1.54 billion, or $2.05 per share, a year earlier.

The company has spent $27 million on rent, employee salaries and supplier expenses in Russia and Ukraine after suspending operations in both those countries due to the war. McDonald’s has reported an additional $100 million in spending on inventory in its supply chain that is likely to go bad due to the temporary closure of its restaurants in Ukraine and Russia. Overall, these expenses reduced the company’s earnings by 13 cents per share.

The company also said it has set aside $500 million, or 67 cents per share, for a potential settlement related to an international tax dispute, but did not provide further details.

Excluding tax-related expenses, restaurants in Ukraine and Russia and other items, McDonald’s earned $2.28 per share, beating the $2.17 per share expected by analysts polled by Refinitiv.

Like the restaurant industry as a whole, McDonald’s has faced higher merchandise and labor costs, forcing the company and its franchisees to raise prices. CFO Kevin Ozan said the company expects elevated inflation to continue throughout 2022 given macro conditions.

net sales rose 11% to $5.67 billion, beating expectations of $5.59 billion. Global same-store sales rose 11.8% in the quarter, driven by strong growth in markets such as France and the UK. Sales of the entire digital system for the quarter exceeded $5 billion.

In the United States, same-store sales rose 3.5%, beating StreetAccount estimates of 3.3%. The company believes that price increases and marketing promotions have contributed to growth in its domestic market. A year ago, the fast-food restaurant chain reported a 13.6% increase in U.S. same-store sales as it catered for weak demand due to lockdowns at the start of the pandemic.

In the first quarter, McDonald’s menu prices in the US rose about 8% year-over-year. Executives said consumers are starting to buy cheaper items on the menu or take smaller orders.

Ozan said consumers are worried about inflation, especially gas prices.

“We’re certainly keeping a close eye on lower end consumers, just to make sure we’re still delivering the right value to our lower end consumers,” he said. “But one of the things that’s probably beneficial right now, as you know, is that eating at home is growing even more than eating out.”

Home food prices rose 10% year-over-year in March, while out-of-home food prices rose just 6.9% in March, according to the Bureau of Labor Statistics.

McDonald’s International Markets segment, which includes France, the UK and Australia, reported a 20.4% increase in same-store sales. The company said cuts to Covid-19 measures boosted sales this quarter. Sales in the UK were also boosted by the limited-time release of Chicken Big Mac, which Kempczynski described as the most successful food promotion on the market.

In the company’s International Licensed Development Markets segment, single-store sales grew 14.7% driven by strong demand in Japan and Brazil. However, in China, same-store sales declined during the quarter as a resurgence of Covid led to renewed lockdowns.

Read the full earnings report here.

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