McDonald’s first-quarter revenue fell 2% to $6.0bn, ignoring exchange rate impacts. Declines were largely driven by weakness in the US, which helped offset an increase in store count. Like-for-like sales were down 1%, below market expectations to remain broadly flat.
Underlying operating profit fell 1% to $2.6bn, below market expectations of $2.8bn.
CEO Chris Kempczinski said that consumers are “grappling with uncertainty”, but full-year guidance remains unchanged. The group expects nearly 1,800 net new stores and operating margins to be in the mid-to-high 40% range.
The shares fell 1.9% in pre-market trading.
Our view
McDonald’s had a disappointing start to the year, with weakness in the US causing revenue and profits to fall. Customers are grappling with a lot of uncertainty and a tight budget, causing them to visit the golden arches less frequently.
With the all-important US market looking under a lot of pressure, particularly among low-income customers, the group plans to put value offerings front and centre in 2025. Executing well on this front will be key to performance as the year progresses. The Group’s scale and efficiency, combined with easing cost pressures, leave it well-placed to deliver these initiatives, but it needs to start delivering results.
The largely franchised model is an efficient operation, with McDonald's off the hook for many of the typical restaurant running costs. Cash conversion in excess of 80% means the vast majority of profits feed into cash for the business to either spend or return to shareholders.
Strong cash flows give it headroom to help cope with bumps in the road and continue its expansion plans, with nearly 1,800 net restaurant openings expected this year. The bias in openings towards franchised operations should help margins once the stores are running at full pelt.
There’s a greater focus on international expansion too. The group’s global footprint means it’s not too exposed to economic conditions in one particular region. It’s also targeting demand for western brands in developing markets, with China being a particular focus.
Tariffs have the potential to disrupt these expansion plans, with China being on the receiving end of some of Trump’s harshest measures. And if tariffs cause a global slowdown, demand could weaken further.
Full-year operating margins in the mid-forties are another positive and there’s scope for further progression this year if it can return to volume growth.
McDonald's is also lugging around a hefty debt pile. Interest costs are expected to rise 4-6% this year as a result of higher debt balances and interest rates. The group enjoys strong cash generation but given the increased cost of debt, we think paying some of this down should be a priority and we’re not expecting a step-change in the level of payouts to shareholders. Of course, no payments can be assured.
We think McDonald’s brand strength remains key to navigating peaks and troughs in demand, and the group looks well placed to extend its share of the fast-food market. With the valuation above the long-term average however, there is some pressure to deliver.
Environmental, social and governance (ESG) risk
Consumer services companies are medium-risk in terms of ESG, and very few companies are excelling at managing them. That leaves plenty of opportunity for forward-thinking firms. The primary risk-driver is product governance. The impact of their products on society, labour relations and environmental concerns are also key risks to monitor.
McDonald’s overall management of material ESG issues is average according to Sustainalytics.
But there are some product governance concerns including controversy over an outbreak of E.coli. There are also question marks over labour relations where it has been the subject of multiple lawsuits and in major controversies. The company discloses sustainability information in its Purpose & Impact Progress Summary; however, there is no evidence that it follows ESG reporting standards.
McDonald’s key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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