McDonald's US Growth Beats as Value Draws Strapped Diners

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00:00We know that McDonald's has been trying to position themselves as one of the value choices

00:05in this economy as things get a little bit harder for people trying to buy lunch, honestly.

00:12What did you make of these reports? Because it seems like the street welcoming them with open arms.

00:17Yeah, thank you so much for having me on today. I think we were pleased by the print this morning.

00:21Honestly, it's been a really difficult environment for consumer companies reporting earnings

00:26and in restaurants in particular. And relatively speaking, it was a pretty happy meal that McDonald's delivered.

00:32I think they were able to talk about several different initiatives that they have done around marketing

00:38and their value offering and then menu innovation. And we think they're delivering value for those consumers

00:44who are seeking out value, but also changing up the menu and delivering solid marketing execution.

00:50So kind of delivering on three key metrics for them, which is helping drive both higher income consumers

00:56consumer traffic and also sort of take share from a lower income consumer standpoint.

01:01Well, let's talk about that breakdown a little bit more because something that jumped out to me was

01:04you take a look at lower income customers. The McDonald's, the chief executive said that they

01:10actually saw traffic among that group drop nearly double digits in the latest quarter. So this pickup

01:16that we're seeing, it seems more like perhaps a trade down than it is, you know, those lower income

01:23consumers coming in and spending more.

01:26It does. I think we were encouraged to see the, from a higher income consumer, sort of the,

01:31they talked about the industry data being up almost double digits, but conversely, almost down double

01:37digits for the lower income consumer. But I think the commentary that they made around the value offering

01:42for that lower income consumer, they talked especially about the extra value meal. They called it the EVM

01:48that has been rolled out and they've seen good success with that, particularly with sort of low

01:54income consumer from a, from a share standpoint. But also they said about 30% of the transactions

02:00were those EVM offerings. So we think the lower income consumer is obviously quite challenged, but we

02:06think McDonald's is offering the right value offerings for those consumers to continue to be able to drive

02:11traffic when that consumer is wanting and willing to eat out.

02:14Abby, what did you learn in the earnings just about how McDonald's is competing with all of the other

02:21fast food, fast, casual options out there for, like Katie said, people that are just looking for

02:27an affordable way to eat lunch?

02:30Yeah, we think, you know, they're really firing on really three different cylinders. I mean, certainly

02:35the value offering, I mean, they talked about the McValue rollout last summer. They're continuing to do

02:41well that extra value meal, the EVM they're doing well, offering those or, you know, five or $8 for

02:47the consumer looking for a specific price point. But also I think they're doing a good job of rolling

02:53out newness. They talked about snack wraps, which rolled out over the summer and the first four weeks

02:58of that launch, one in five consumers ordered that. So I think they're offering enough from a value

03:04standpoint, enough to get consumers interested. And then just kind of the last thing is on the marketing

03:10side of thing. They've relaunched Monopoly for the first time in almost 10 years in October. And

03:15they specifically said that that has helped in terms of driving momentum for the business in

03:20October. So keeping things a little bit fun for the consumer, but also delivering the value where

03:25that's needed for consumers, you know, whose wallets are a bit pressed.

03:28Well, I'd love to bring this conversation more towards the portfolio, because as I mentioned,

03:33you're a senior portfolio analyst over at Allspring Global Investments. You cover consumer staples

03:38and consumer discretionary sectors in particular. That is your area of expertise. So, I mean,

03:43what is the competitive landscape that McDonald's sits in actually look like right now? And where

03:49exactly does McDonald's fall in that?

03:52Yes, certainly, you know, from a consumer standpoint, one of the things that we like

03:56about McDonald's is it's a bit more defensive. And you've seen that here of consumers are stressed,

04:01a bit stressed and strapped. And McDonald's is synonymous with value. For us,

04:06we see it as a way to obviously play from a discretionary standpoint. But an offering that's

04:11a bit, their offering is a bit more defensive in nature. So we see it as a bit more of a defensive

04:15staple. And I think being able to play in an environment that they tend to do well when we see

04:21more difficult economic times. So that's kind of how we're playing the name in this space. We like

04:26it for the long term. And we're long term investors. And we think they're great operators

04:30longer term. And there's a lot that we like about them being able to grow the top line and then also

04:36margins. But we think here in the short term, it definitely has a nice defensive benefit as well.

04:41What other consumer focused names do you like right now if we're in this environment where

04:47consumers are a little bit more stretched?

04:49You know, we think one of the most important things here is companies with healthy balance

04:54sheets. And particularly as we head into the holiday season, just those companies who are able

04:59to, you know, have solid balance sheets, have solid inventory levels. And, you know, depending on how

05:05the consumer is going to react heading into holiday, if mark nouns need to occur, that we want to make

05:10sure that those companies have healthy inventory positions. And then just also from a free cash flow

05:15standpoint, those companies who can generate free cash flow in excess of their peers so that if

05:20economic times get more challenging and the consumer outside of the lower income consumer starts to

05:25change more materially, that those companies can control their own destiny.

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