McDonald’s (MCD) Q1 earnings results suggest consumers are laying off Big Macs amid economic uncertainty. The world’s most recognizable fast-food chain, with over 43,000 locations in more than 100 countries, reported a 3% drop in both revenue and operating income. McDonald’s remains a rather consumer-friendly stock that stays buoyant in troubled times, and so the food giant’s stock sell-off didn’t last long.
To be fair, the fast food giant missed revenue only narrowly ($5.96 billion versus $6.09 billion expected). It was most surprising that its U.S. same-store sales fell 3.6% during the first quarter, marking the worst performance since the pandemic. Of course, McDonald’s is no stranger to economic challenges, and recent initiatives make me bullish on the stock regardless of what the economy has in store in the short term. The stock is down only 1% since McDonald’s published its quarterly results.
Q1 Headwinds Reveal Broader Economic Concerns
What’s most interesting about McDonald’s most recent result is what it implies about the overall economy. Low-income consumers are the first to pull back in trying times. It appears the “other domino” has fallen. McDonald’s also saw its middle-income consumers pull back in the first quarter, implying that economic pressure has broadened beyond the most disadvantaged.
Granted, this is a sector-wide challenge, although McDonald’s is particularly vulnerable as its customer base skews more heavily toward budget-conscious diners. While higher-income diners maintained traffic, they did not make up enough of McDonald’s customer mix to balance any losses from other segments. Global comparable sales decreased 1%. So, it’s not just the U.S. that is dealing with hardships. Europe, for instance, is amid an inflationary cycle.
Interestingly, McDonald’s digital ordering channels were more stable than its in-restaurant numbers. Mobile app orders declined by only 0.8% year-over-year. The company launched its mobile app in 2015, and it remains a popular food app today.
Strategic Recovery Initiatives Set the Stage for MCD
McDonald’s is always full of ideas and has a plan to deal with tough economic realities. If it handled COVID with flying colors, then a quarter of slowing sales shouldn’t be too problematic. Its promotions continue to be popular, with the recent Minecraft Movie promotion proving to be particularly successful, driving foot traffic in April according to data from Placer.ai.
Moreover, fast-food specialists keep innovating their menus. For instance, the new McCrispy Chicken Strips are a hot item. The company also plans to return the popular snack wraps sometime this year. Critically, the fast-food giant remains laser-focused on value. It is extending its $5 meal deal through the remainder of 2025.
In the meantime, McDonald’s continues its expansion efforts, with plans to open over 2,000 new locations globally in 2025. It plans to spend $3 billion on capital expenditures this year, signaling confidence in its growth prospects.
Keeping up with today’s hottest trend, McDonald’s is adopting artificial intelligence (AI) to improve operational efficiency. For example, the company is exploring AI to streamline drive-through order-taking, while many locations now feature self-order kiosks that help reduce labor costs. Thanks to its massive scale, McDonald’s can also manage food costs effectively. In the past, it has used its buying power to negotiate lower prices from suppliers. Today, controlling both labor and food costs is crucial to supporting its value-focused strategy and maintaining its leadership position for the long term.
Is McDonald’s a Good Stock to Buy?
According to Wall Street, MCD is a Moderate Buy based on 15 Buy, nine Hold, and zero Sell ratings in the past three months. MCD’s average price target of $331.48 represents ~6% upside potential over the next twelve months.
Earlier this week, Wells Fargo analyst Zachary Fadem reiterated a Buy rating on MCD with a price target of $350. The analyst expressed optimism after the suboptimal first quarter earnings report, noting that “McDonald’s demonstrated strength in April and maintained its market share gains, with further innovations on the horizon.” Moreover, he believes McDonald’s international growth should help ease macroeconomic challenges.
Meanwhile, Jefferies analyst Andy Barish is bullish on MCD. He has a price target of $360 on its stock and views the company as a “strong performer in uncertain economic conditions, supported by its ability to generate free cash flow and expand its operational margins.”
MCD Stability in Volatile Markets
While McDonald’s first-quarter earnings raise concerns about the company and broad-based consumer spending pressure, McDonald’s seems capable of weathering the storm. Its proactive value strategy, menu innovation pipeline, and technological efficiency initiatives position the fast food conglomerate to gain market share during challenging times, as it has done plenty of times in the past.
The stock’s reasonable Price to Earnings ratio of 27.4, consistent cash generation, stable stock performance (as evidenced by a beta of just 0.39), and a healthy 2.15% dividend yield may appeal to value investors.
Given its proven resilience through economic cycles, MCD may also appeal to investors looking for solid ground amid market volatility. Looking ahead to the rest of the year, should middle-income consumer spending stabilize, McDonald’s could see accelerated growth due to its expanding global footprint and enhanced digital ecosystem. For these reasons, I am bullish on MCD.