San Francisco Frontiers - Profits fall at McDonald's as it redoubles value push

All three of the chain's operating regions experienced comparable sales declines, a significant weakening next to the year-ago results when global comparable sales jumped nearly nine percent.

For much of the recent period of rising consumer prices, McDonald's garnered strong sales gains from diners who "traded down" to the fast food giant from more expensive rivals. Executives said the market had, however, shifted in the most recent period.

"We are seeing trade down, but what we're seeing is that the loss of the low-income consumers is greater than the trade-down benefit," said Chief Executive Christopher Kempczinski on a conference call.

"You're seeing with that low-income consumer, in many cases, they're dropping out of the market, eating at home and finding other ways to economize."

Profits for the quarter ending June 30 were $2.0 billion, down 12 percent.

Revenues were essentially flat at $6.5 billion.

In its home market of the United States, McDonald's experienced a drop in guest counts, although results were bolstered somewhat by digital and delivery growth.

McDonald's international developmental licensed markets were hit by negative results in China and the drag from the Israel-Gaza war, which has seen some consumers boycott the chain.

Executives cautioned that the weakness from the latest quarter was extending so far into the third quarter.

"We don't expect that we're going to see a change in that environment over the next few quarters," said Chief Financial Officer Ian Borden. "That's why we're laser-focused on getting value and affordability right."

- $5 meal in US -

McDonald's in June kicked off a $5 meal promotion in the United States that includes a sandwich, small fries, a small soft drink and a four-piece Chicken McNuggets package.

The summer offering is a pitch to inflation-weary consumers to "help your dollar go further," said a June 20 company announcement.

Executives said Monday they were pleased with the additional traffic generated by the program and that 93 percent of US restaurants had agreed to extend it further into the summer.

Kempczinski described a broad campaign to win back consumers that will also entail menu changes and marketing campaigns.

"We are resolved to reignite share growth in all our major markets regardless of the prevailing market conditions," he said. "This won't happen overnight, but it will happen."

While McDonald's results translated into earnings below expectations, shares rallied 4.5 percent around midday.

A note from Briefing.com characterized the share gains as a surprise but noted that McDonald's shares had fallen 17 percent since mid-January.

"We think the stock is higher because a lot of negativity was priced in already," Briefing.com said.

The poor results "seems to have shaken McDonald's up and has lit a fire under them to focus more on value," Briefing.com added. "Investors seem to be reacting positively."

B.Johnson--SFF