McDonald’s earnings ‘the bellwether for the industry,’ analyst says

BTIG Managing Director and Restaurant Analyst Peter Saleh joins Yahoo Finance Live to discuss quarterly earnings for McDonald’s, the fast-food chain's U.S. expansion plans, consumer spending, and the outlook for profit growth.

Video transcript

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BRAD SMITH: McDonald's investors aren't loving its Q4 earnings report, despite the fast food company posting a 12.6% increase in global comp sales for the year and citing continued guest count growth. BTIG Managing Director and Restaurant Analyst Peter Saleh joins us now, alongside Yahoo Finance's Brooke DiPalma for the conversation.

Peter, thanks for taking the time here with us this morning. First to kick things off, your perspective and takeaway from the earnings given the stock reaction that we're seeing here on the day?

PETER SALEH: Yeah, great. Thanks for having me on. So look, I think the reaction isn't a function of their performance in the quarter. I mean, you had 25% same-store sales growth on a two-year stacked basis. Really, that's quite unheard of in this space for a company of this size. And they beat on the bottom line. So I don't think it's a function of what happened in the fourth quarter.

It's really a function of the outlook for '23. They're making some additional investments to support franchisees in Europe in '23, given all the inflation that we're seeing there. Additionally, they're expecting maybe restaurant level margins to be a little bit lighter than what was initially anticipated by the Street in '23. So I think those two are kind of pressuring the margin a little bit on their outlook for '23 and causing the stock to be down, just a low single-digit decline in the stock today.

BROOKE DIPALMA: Good morning, Peter. Also on the call this morning, McDonald's announced plans to open 1,900 restaurants in 2023, 400 of which will be here in the US, and internationally. You speak to franchisee owners often. Do you think that they expected this aggressive of a growth plan here?

PETER SALEH: Yeah, so look, I think the growth in the US is still going to be rather nominal, at best. I think they're going to open about 100 stores and close maybe another 80, get to about a net number of about 20. But from our conversations with franchisees, they've been telling us, yes, I mean, we need more stores because the volumes in the stores that we have have grown so much that we need to offset it with additional units.

So we're not surprised that they're trying to accelerate development. I mean, they told us even about that maybe a year ago. And they told us about it a couple of weeks ago that they want to accelerate development. So it's not really a surprise on the development side given the strong same-store sales that you're seeing across the board.

BRIAN SOZZI: Peter, McDonald's specifically called out strengthening the McRib in the US business as a key same-store sales driver. Are they wrong to potentially be taking this item off the menu? And why is a sandwich like this continue to be so popular?

PETER SALEH: So they've-- in the past, they've taken it off, and they brought it back. So this is something I think that will be pulsed in. This is not the end of McRib. McRib will come back at some point. Maybe it's not '23. Maybe it's '24. Who really knows at this point?

But look, it's working for them. So long as it continues to work and drives customer traffic, they will continue to pulse it back in. It's just not a permanent piece of the menu. So I suspect you're going to see-- you haven't seen the end of McRib quite yet.

BROOKE DIPALMA: Very interesting stuff there. Let's keep to here in the US. Frequency for low income was higher this past quarter, but transactions were down slightly. Should that continue, do you think that consumers will trade down, we'll see more consumers heading to McDonald's?

PETER SALEH: You know, what was most interesting on the call that they actually said that they're seeing the frequency of their lower-income consumers actually increase but that they're coming in and being a little bit more, I guess, budget conscious and spending a little bit less. I think that's a good sign. I think that just suggests that the consumers still want to come back to McDonald's. They're just-- they just have less to spend, which is fine for the time being, but they're visiting more frequently. I think that's more important than anything else.

So it seems like the lower-income consumer is doing a little bit better. We've heard some of those comments at a conference that we were at earlier this month, suggested that things have stabilized a little bit with that low-income consumer. So we just don't see it getting really that much worse. It seems like even the comments from McDonald's today suggested that the lower-income consumer's holding up better in the US and in Europe better than they actually expected.

JULIE HYMAN: Even though at this point, it's costing McDonald's a little bit, right, because of the mix and what these consumers are buying. I'm curious, Peter, what the read-through is for the rest of the restaurant industry? I mean, McDonald's is the first company-- first big company to report here. What does what they've said tell us about how the industry's going to do?

PETER SALEH: So I mean, McDonald's really is the bellwether for the industry, right? I think they're taking share, so I don't expect all the rest of the operators to put up numbers similar to this. I think McDonald's has definitely taken share. But you can see that the health of the industry is clearly there.

Additionally, they commented on January. They said, look, good weather, lapping Omicron has really helped us in January in the US, maybe even over in Europe. So I think you're going to see that continue.

They also commented on commodities. Commodity inflation is moderating. McDonald's had mid-teens commodity inflation in '22. It's expected to be mid-single-digits, maybe as high as high-single-digits in '23. We think McDonald's will probably be on the higher end versus the industry. We think the industry will be more like mid-single-digits in '23.

So you're seeing a moderation in commodity inflation. You're seeing same-store sales hold up fairly well. Pricing is flowing through. That low-end consumer is holding up. Frequency's starting to improve. So it seems to us like the industry is rather healthy, and I think it's going to see that reflected in many of the other names that report over the coming weeks.

BRAD SMITH: Do you think that the industry will still continue to make bets and bets like the McPlant? If you've got a company in McDonald's that's prioritizing a lower-income consumer or leaning into the McNuggets staples even, if you will, what does that mean for some of those bets that they've made on plant-based options on the menu too?

PETER SALEH: Well-- and look, McDonald's has tried the plant-based options last year. I think it launched around Valentine's Day. It ran for about eight weeks and seemed to just not resonate with consumers. So at this point, I think it's on the back burner.

Look, McDonald's is focused on the core of the menu and the things that drive the vast majority of their sales. They're not really exploring options outside of that. And it's working, right? The drive-through speeds are improving. Their same-store sales are accelerating.

Consumers are reacting to what they're putting on the menu, which is, honestly, less alternatives. They're not branching out and putting on plant-based meat items or a lot of menu innovation. They're focusing on their core, and that's been working for them, really, since the pandemic. So I don't expect that to change anytime soon.

BRIAN SOZZI: Big Macs or bust for McDonald's. Let's leave it there for now. BTIG Managing Director and Restaurant Analyst Peter Saleh, thank you so much, and alongside our very own Brooke DiPalma. Thanks so much. Appreciate it.