McDonald's reports first sales miss in nearly 4 years on overseas weakness

McDonald's reported its first quarterly sales miss in nearly four years on Monday, squeezed by weak sales growth in its business division that includes the Middle East, China and India.

The burger giant is among several Western brands that have seen protests and boycott campaigns against them over their perceived pro-Israeli stance in the Israel-Hamas conflict.

Comparable sales in McDonald's International Developmental Licensed Markets segment rose 0.7 percent in the quarter, widely missing estimates of a 5.5 percent growth, according to LSEG data. The business accounted for 10% of McDonald's total revenue in 2023.

CEO Chris Kempczinski last month flagged a "meaningful business impact" in McDonald's Middle East market and some areas outside the region due to the war as well as "associated misinformation" about the brand.

"The effects (of the war) on earnings durability would be our biggest concern ... it looks like this is going to be an issue that persists past the next quarter or maybe even two," said Brian Mulberry, client portfolio manager at Zacks Investment Management, which holds McDonald's shares.

Starbucks last week also cut its annual sales forecast, partly due to a hit to sales and traffic at stores in the Middle East.

Meanwhile, consumer spending in China, McDonald's second-largest market, has also remained weak despite government support measures.

Starbucks previously said a sales recovery in China was slower than its expectations. McDonald's would have also seen similar trends in China in the quarter, Zacks Investment's Mulberry added.

McDonald's Indian franchisee also reported its first revenue decline in three years.

Chicago-based McDonald's does not break down sales in these markets.

The company's US business is also starting to show signs of weakness. Traffic at McDonald's US stores slumped 13 percent in October, according to Placer.ai data cited by Wells Fargo. It declined 4.4% and 4.9% in November and December, respectively.

Comparable sales in the US climbed 4.3 percent in the fourth quarter, just shy of estimates of a 4.4 percent rise.

Still, the company reported an adjusted profit of $2.95 per share, beating estimates of $2.82 per share.

"It's going to take some time for the results to bounce back (in the Middle East)," Stephens analyst Joshua Long said, adding he was still positive on McDonald's stock given it is "one of the best positioned brands" to navigate a tricky macroenvironment.

McDonald's projected 2024 operating margin to be in the mid-to-high 40 percent range and expects more than 1,600 net restaurant additions this year.

It reported an operating margin of 45.7 percent for 2023. The company's shares were down marginally in volatile premarket trading.

McDonald's's global same-store sales increased 3.4 percent in the quarter, missing estimates of a 4.9 percent rise. That represented the slowest sales growth in about three years.

Reuters