McDonald's president flags a worrisome trend, shifting…

McDonald's president flags a worrisome trend, shifting outlooks

You no longer have to pay nearly $5 just for a taste of McFlurry.

After introducing its $5 meal earlier this year, McDonald’s (MCD) has rolled out a mini version of its famous McFlurry dessert, offering customers a lower cost to enjoy the same classic flavors like Oreo and M&Ms, starting Sept. 10.

McDonald's is relying on cheap meals to win back customers who are increasingly tightening their budgets.

In June, the fast-food chain unveiled its summer value meal, which includes four items: a choice of a McDouble or McChicken, four pieces of chicken nuggets, small fries, and a small soft drink. The meal is still available at the chain's outlets.

“We heard our fans loud and clear – they're looking for even more great value from us, and this summer that's exactly what they'll get," McDonald’s U.S. President Joe Erlinger said in a statement, “Value has always been part of our DNA.”

McDonald’s said its $5 Meal Deal was exceeding expectations and was bringing lower-income consumers back to the stores.
Image source&colon; Ezra Acayan/Getty Images

What could be next for McDonald’s shares?

About a month ago, McDonald’s reported second-quarter earnings that missed estimates. Its share price rose following the results.

For the quarter, the fast-food giant reported diluted earnings per share of $2.80, an 11% decline that fell short of the analyst consensus estimate of $3.07 a share. Revenue came in at $6.49 billion, below the $6.62 billion forecast.

McDonald’s also reported the first quarterly decline in same-store sales since the fourth quarter of 2020, saying that expected comparable sales would continue to decline in the coming quarters.

But the value meal works.

McDonald’s said its $5 meal deal was exceeding expectations and was bringing lower-income consumers back to the stores. The success helped the shares gain ground on earnings day.

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“We've seen a lot of enthusiasm, and the number of $5 meal deals sold are above expectations," Erlinger said during the earning call. "Trial rates of the deal are highest amongst lower-income consumers, and sentiment towards the brand around value and affordability has begun to shift positively.”

However, McDonald's president also had some grim thoughts about how business may evolve from here.

“We expect customers will continue to feel the pinch of the economy and a higher cost of living for at least the next several quarters in this very competitive landscape,” Erlinger warned.

Analysts adjust McDonald’s share-price target

Jefferies raised its McDonald's stock price target to $330 from $310 with a buy rating.

The analyst told investors that McDonald’s' August foot traffic data showed an average increase of more than 3%, compared with flat growth in Q2, according to thefly.com. Jefferies highlighted that McDonald's' enhanced focus on value marketing is driving traffic more effectively and sooner than anticipated.

Loop Capital maintained a buy rating and $342 price target for McDonald's but noted that Q3’s same-store sales growth is currently exceeding expectations.

“The launch of the $5 Meal Deal on June 25th generated an estimated [3- to 3.5-percentage-point] lift to same-store sales during the initial late June-early July period and a still solid [2- to 2.5-percentage-point] boost since mid-July,” the analyst said in a research note.

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Tigress Financial also noted McDonald’s "value proposition," lifting its price target on McDonald's to $360 from $355 with a buy rating.

The analyst said McDonald’s' "operational excellence and leveraging of key digital initiatives and its loyalty program" had helped the company "drive strong performance in a difficult consumer environment."

McDonald’s stock closed unchanged at $291.27 on Sept. 10.

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