McDonald's was riding a wave of momentum to begin the fourth quarter before an E. coli outbreak in multiple US states linked to Quarter Pounders left one person dead and several hospitalized. Same-store US sales in the first three weeks of October were close to "mid-single-digit positive," and guest counts increased, McDonald's Chief Financial Officer Ian Borden said Tuesday on a conference call with analysts.
After the announcement on the E. coli outbreak by the Centers for Disease Control and Prevention, the company faced "daily negative sales and guest count results," he said. The fast-food giant linked the cases to onions from a supplier, Taylor Farms, in Colorado Springs, Colorado, Chief Executive Officer Christopher Kempczinski said on the earnings call.
McDonald's stopped sourcing onions from the site "indefinitely," he said. The CDC said Friday that 75 cases were reported in 13 states, resulting in 22 hospitalizations and the lone death. McDonald's beef suppliers are producing a new supply of patties in those areas, and sales of Quarter Pounders in its US restaurants are expected to resume soon, Kempczinski said. The ultimate financial impact of the outbreak on the company has yet to be determined, though McDonald's response to the crisis has been commendable, Jim Sanderson, an equity analyst at Northcoast Research, said in an interview with MT Newswires. "McDonald's has done a good job of quickly identifying the issue," Sanderson said.
"They've made a lot of headway and demonstrated, from an industry perspective, that this happened because of an external supplier. The integrity of the brand is still intact." Prior to the outbreak, executives on the Q3 earnings call Tuesday probably were poised to focus on McDonald's strong performance, particularly in the US, where initiatives like the $5 Meal Deal bolstered traffic and sales among lower-income customers who had opted to eat at home rather than dining out amid high inflation. McDonald's reported third-quarter non-GAAP earnings rose to $3.23 per diluted share from $3.19 a year earlier, exceeding the consensus estimate of analysts polled by Capital IQ at $3.20.
Revenue climbed to $6.87 billion from $6.69 billion, topping the consensus of $6.82 billion. US same-store, or comparable, sales increased 0.3% versus a decline of 0.7% in the previous quarter, and the gap between its comparable guest count to those of its competitors was the highest since the first quarter of 2023, CFO Borden said. "This was achieved through a combination of more compelling value through the $5 Meal Deal alongside great marketing such as the Collector's Edition campaign," Borden said. With the $5 Meal Deal unveiled at the end of the second quarter, the company monitored improved perceptions about affordability and value, resonance with lower-income consumers and a shift in guest counts. "The $5 Meal Deal has done just that and continued drawing customers back into our restaurants throughout the quarter, maintaining an average check north of $10 and being profitable for our franchisees," Borden said. The $5 Meal Deal, extended into December, was needed to slow traffic trends, said Danilo Gargiulo, a Bernstein equity analyst. The perception of the industry indicated the restaurant giant "was completely lacking affordability among consumers after an increase in prices by franchisees," Gargiulo said.
"It was important to have everyday affordable pricing entry points on low-value items that could attract people who can afford to eat out at McDonald's." The success of the $5 Meal Deal should help convince franchisees of the potential of the company's value platform that it plans to roll out in the first quarter of 2025 that will combine everyday affordable price menus and meal bundles, Gargiulo said. The company plans to leverage value offerings to drive more traffic and guest counts and pair those with more profitable items, including a new Chicken Big Mac and Collector's Edition cups. "That's where we're going to get that check growth and profit growth," Borden said.
"We're not worried about that value component because, at the end of the day, we've got to have that in place to be competitive and to drive market share progress." As its US business spurred optimism, McDonald's third-quarter performance in international markets triggered concerns. Comparable sales in the international operated markets segment fell 2.1% and dropped 3.5% in the international developmental licensed segment. International markets face "layers of headwinds" with Europe and China experiencing "tougher" economic cycles than the US, Northcoast's Sanderson said. "On top of that, the effect of the Middle East war on US brands, we believe they're actually seeing some pressure in European markets," Sanderson said.
"It's possible these consumers are purchasing away from US brands, opting away, quiet boycotts. Other US brands are experiencing these types of headwinds." The company moved to generate more traffic at international stores, introducing a Happy Meal for 4 euros in late August. In the UK, restaurants reinstituted an offering of three items for 3 pounds.
In Germany, a pilot program debuted for a full-margin larger hamburger, the Big Arch, which was paired with the McSmart platform. Ultimately, however, circumstances outside of the company's control will influence its global sales figures, Borden said. "As we have stated before, as long as the war in the Middle East continues, we expect our business to continue to be impacted," he said..