McDonald’s Q4 boosted by higher menu prices amid inflation alarms

McDonald’s on Tuesday beat Wall Street estimates for quarterly profit on higher menu prices, even as it warned short-term inflationary pressures would persist in 2023.

Shares of the burger chain fell 1.3% to $267.40, after gaining about 6% in the last 12 months.

Investors are watching bellwethers like McDonald’s for any sign consumers are cutting spending to help determine whether the Federal Reserve’s monetary tightening will help cool the US economy without causing a recession.

The Big Mac maker also expects its accelerated plan to build more new restaurants will boost business, contributing nearly 1.5% to its 2023 systemwide sales growth in constant currencies.

Like other fast-food chains, Chicago-based McDonald’s raised prices of its burgers and fries last year to keep up with surging commodity and labor costs and it forecast margin growth this year.

“Overall, the consumer, whether it’s in Europe or the US, is actually holding up better than… what I would have expected a year ago or 6 months ago,” Chief Executive Officer Chris Kempczinski said during a call with investors.

Even so, he said the Big Mac maker still expects a mild to moderate U.S. recession this year, with a deeper, longer recession in Europe.

Even so, traffic rose 5% for full-year 2022, McDonald’s disclosed on Tuesday, as its meals remained less expensive than many competitors, drawing low-income consumers.

A Big Mac in New York City now costs about $5.39 – less than a $5.65 Venti Cappuccino at a nearby Starbucks.

McDonald’s fourth-quarter global same-store sales also beat estimates with a 12.6% rise, compared with the average analyst estimate of an 8.6% increase, according to IBES data from Refinitiv.

McDonald’s benefited from higher menu prices, increased restaurant traffic and sales in the UK, Germany and France rose despite fears of a recession in Europe.

The company reported profit of $2.59 per share, an increase of 16%. Analysts on an average expected profit of $2.45.

McDonald’s also said it expect its 2023 operating margin to be about 45%, versus 40.4% in 2022.

In October, Chief Financial Officer Ian Borden said the company was “gaining share right now among low-income consumers” in the United States because of McDonald’s “affordability.”

He did not define “low income” but data provider the NPD Group defines annual household incomes of $75,000 or less as “lower income.”

The company launched its Cactus Plant Flea Market Box – an adult version of its Happy Meal for kids – with core menu items including its Big Mac and Chicken McNuggets, helping it post better-than-expected US sales.

“McDonald’s is in the right place at the right time for being a market share gainer in this environment,” said Neuberger Berman analyst and portfolio manager Kevin McCarthy.

Visits to McDonald’s US locations rose 26% in the fourth quarter versus 2019 and were up nearly 30% compared with the previous year, according to data from location analytics firm Placer.ai. That is compared to a 0.6% decline for fast food overall in the fourth quarter over the previous year.

Visits to some other fast-food chains started to fall last summer as they hiked menu prices, he said.

McDonald’s US comparable sales rose 10.3% in the quarter ended Dec. 31. Global revenue dropped 1% to $5.93 billion because of the impact of the stronger US dollar against foreign currencies while in constant currencies, revenue rose 5%.