Key highlights from McDonald’s Corporation (MCD) Q2 2023 Earnings Concall
Management Update:
- [00:03:05]MCD said it is continuing to double down on its existing growth pillars while evolving its strategy through Accelerating the Organization initiative.
- [00:6:48] The company is accelerating the pace of restaurant openings in its major markets over the next several years.
- [00:07:50] The company is developing a new concept called CosMc’s, which will be a small format concept with all the DNA of McDonald’s, but its own unique personality.
- [00:15:39] MCD is investing in digital innovation, with its loyalty program now representing nearly 40% of system-wide sales in its top six markets.
- [00:16:40] MCD expects top-line growth to moderate in the second half of the year.
Q&A Highlights:
- [00:21:51] Eric Gonzalez with KeyBanc asked if there have been any changes to MCD’s expectations for the U.S. consumer, and have trade down or check management behaviors intensified in the last quarter. Chris Kempczinski CEO said the U.S. consumer sentiment is slightly improving but still below 2019 levels. MCD is gaining share among lower-income groups as people trade down from full-service dining. The company’s value positioning is helping it weather the economic storm and drive share gains.
- [00:26:13] David Tarantino with Baird enquired how MCD expects the check growth component to moderate as the inflation environment gets a little bit more moderate. Ian Borden CFO answered that MCD expects top-line growth to moderate in 2H23 due to the end of COVID-related tailwinds, rising interest rates, and elevated inflation. However, the company is still gaining market share and outperforming the competitive set.
- [00:29:39] Jeff Bernstein with Barclays queried about the primary drivers of the increase in operating margin guidance from 45% to 46%, and how MCD sees operating margin trending in the next 1-3 years. Ian Borden CFO clarified that MCD raised its operating margin guidance for 2023 from 45% to 46%, citing top-line growth and cost savings. However, the company also expects inflationary pressures and margin pressures to continue in 2H23.
- [00:32:03] David Palmer with Evercore asked about IOM trends, insights, and macro headwinds MCD is seeing, and whether the value menu launches in Germany and the U.K. were proactive or reactionary. Chris Kempczinski CEO replied MCD’s IOM business is performing well, despite facing significant inflationary pressures. The company is focusing on value, core menu, chicken, and digital to drive sales. Loyalty program sign-ups are also growing, which is a tailwind for the business.
- [00:36:28] John Ivankoe at J.P. Morgan enquired if it makes sense to consider the return of a dollar-style menu in countries like the U.S., Canada, France, and Australia to drive traffic and sales, even if it may affect margins. Chris Kempczinski CEO said that MCD is winning on value, and the company is not planning to make any major changes to its value programs. However, some markets may emphasize awareness of existing value programs in their marketing communications.
- [00:39:50] Brian Bittner with Oppenheimer asked about the cause of the drag on store-level margins in the U.S. despite strong top-line growth and if store-level margins can improve as top-line growth potentially slows. Ian Borden CFO said that MCD believes that focusing on driving strong momentum in the business is the best way to achieve sustainable margin improvement. The company expects McOpCo margin in the U.S. to be similar to 4Q22, but is confident in its ability to drive margin dollar and percentage growth over time.
- [00:43:14] Dennis Geiger of UBS asked about the key drivers of MCD’s success in maintaining momentum and share gains in the U.S. and how the company plans to sustain this success in the next year and beyond. Chris Kempczinski CEO said MCD is executing its Accelerating the Arches strategy across all aspects of the business, including marketing, core menu, 3Ds/4Ds, and digital. This is driving momentum and giving the company confidence in its long-term prospects.
- [00:50:32] Andrew Charles with TD Cowen asked about the factors that would lead to a reduction in MCD’s outlook for targeted and temporary rent relief in Europe, and how much of the relief has been spent so far in 2023. Chris Kempczinski CEO said MCD has provided rent relief to franchisees in Europe to help them weather the current economic challenges. The company expects to spend $100 million to $150 million on rent relief this year.
- [00:54:07] Sara Senatore Profile at Bank of America asked what the back-half spending might be and how to think about G&A as a percentage of system sales going forward. Ian Borden CFO replied MCD is investing more in technology and digital in the back half of the year, which is why G&A expenses are tracking below the full-year guidance. The company believes these investments will drive growth and generate a return.
- [00:54:29] Sara Senatore Profile at Bank of America also enquired about the pricing and commodity basket inflation for the U.S. and IOM, including how much price is on the menu and what the baskets look like. Ian Borden CFO said MCD’s pricing is expected to remain elevated in the low double-digit range in the U.S. for the rest of the year. The company has taken pricing measures to offset inflation, while maintaining traffic growth and market share gains.