McDonald’s (MCD) and Inflation

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While commenting on quarterly results is something that we, as a firm, don’t do a heck of a lot of, we see value in highlighting data points from the various releases that are interesting and relevant to our broader thematic work and a couple things jumped out at us from the MCD earnings call.

MCD, for the moment, appears to be stuck between a rock and several hard places.  We are referring specifically now to inflation and the impact it is having on the income statement. The company mentioned that low rates of food at home inflation were limiting pricing power and to the extent that food at home continues to lag food away from home, competition from the grocery channel was a concern.

The company’s pricing actions have been “deliberate” as it continues to try and gain share in a category that is declining (informal eating out) so the company’s pricing actions have remained below the broader food away from home price index gains of approximately 2.2% (trailing 12 months ending June).  The company indicated that pricing was +1.5% on a trailing 12 month basis, or about 120 bps below ’12.  Some additional thoughts:

  • The company is seeing a great deal of price discounting in the informal eating out category
  • Informal eating out is projected to be down as a category 50 bps

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Finally, the company suggested that both food at home and food away from home are currently projected to be up 2.5% to 3.5% for the year.  Quite frankly, we can’t get there on food at home given the low rates of inflation seen year to date with no signs of a pickup.  The comment struck us as more wishful thinking on the part of management with respect to having some relief from the lack of inflation in the grocery segment.  We hesitate to build any investment thesis around those comments.

Our view is that companies (MCD included among them) that require inflation in order to deliver increases in comparable store sales and margins are going to be challenged in the current environment.  We continue to see MCD as a relative underperformer versus the broader restaurant group as well as versus the XLY.

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