Fast-food giant McDonald's (MCD -1.52%) reported solid third-quarter numbers late last month. Overall revenue of nearly $6.7 billion was up 11% year over year, with same-store sales in the United States growing 8.1%. Earnings of $3.19 per share topped expectations of only $3, well up from last year's Q3 bottom line of $2.68. In many ways, the challenging, inflation-riddled economy works in its favor by driving consumers to look for bargains -- even when it comes to a meal.
There are two other nuanced takeaways from McDonald's third-quarter results, however, that all investors might want to keep in mind for the foreseeable future.
Two noteworthy details from McDonald's Q3
The first takeaway is related to what sold well last quarter, and who made more visits to its restaurants.
Simply put, the company continues to serve more affluent consumers at the same time its more budget-conscious middle-income consumers are looking for -- and finding -- ways to minimize the total cost of their order. As CFO Ian Borden explained during the third-quarter earnings call, "We're certainly partly benefiting from the trade down from more expensive alternatives within those kinds of income or segment levels."
Meanwhile, more of its lower-earning customers may be starting to steer clear altogether. Data from Placer.ai indicates the chain's overall foot traffic was down 1.1% year over year in August and lower by 3.7% in September. CEO Chris Kempczinski conceded, "We're just going to need to continue to keep a close eye on that $45,000 and under consumer because of the pressure that they're feeling there and make sure that we're offering value."
It remains to be seen if McDonald's can do enough to continue providing value at prices that are still profitable.
The second detail quietly buried in McDonald's third-quarter numbers is that inflation remains rather rampant, particularly for restaurants.
It's a bit difficult to determine with just the headline figures featured in its quarterly press release; you have to dig deep into the report to find it. But it's there. Last quarter's total restaurant expenses were up 12% year over year, outpacing sales growth. Operating costs for the handful of stores the parent company owns (most McDonald's are owned and operated by franchisees) were up 20%.
Image source: McDonald's Q3-2023 earnings press release.
Presumably, this means franchisees' costs were up to a similar degree. They're buying the same supplies and hiring employees at the same hourly rates, after all.
It's not the end of the world. The company -- and most of its franchises for that matter -- remains profitable. Profits are even up in step with sales growth. The costs of supplies and labor are still obviously up by even more, though.
Implications for companies beyond McDonald's
The thing is, what's ailing McDonald's most right now likely isn't just ailing McDonald's. Other consumer-facing companies saw the same underlying headwinds, or tailwinds, depending on the scenario.
Retailer Target (TGT +0.26%) is one of those other companies. While Target is generally compared to rival discounter Walmart (WMT -1.18%), lingering inflation takes more of a toll on Target than Walmart. Much of Target's inventory qualifies as discretionary goods rather than consumer staples, which makes it easier to stop shopping at Target when money gets tight. To this end, the company's same-store sales slumped 5.4% during the fiscal second quarter ended in July.
And things haven't likely improved in the meantime. Target CEO Brian Cornell conceded in an interview with CNBC's Becky Quick last week that "even in food and beverage categories, over the last few quarters, the units, the number of items they're buying, has been declining."
Walmart, meanwhile, has been touting its success as a trade-down option. Last quarter's same-store sales in the United States were up 6.4% year over year, with groceries driving the bulk of that growth, and higher-earning consumers responsible for most of groceries' forward progress. Several times since the middle of last year the company noted most of its growth in food categories came from households earning more than $100,000 per year, an income demographic McDonald's also says it's now doing well with.
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Key Data Points
The underlying dynamic isn't proving a boon for all value-oriented companies, though. Take Dollar General (DG +1.49%) as an example. While it's been seeing more higher-earning shoppers in its stores in recent years, its core customer and target market largely remains households earning less than $40,000 per year -- a sliver of consumers who are hit disproportionally harder by inflation than higher-earning households. That's why its same-store sales were stagnant in its fiscal quarter ending in early August despite the challenging economic environment.
In the meantime, rising costs pose a threat to all of these organizations' bottom lines.
Connect the dots
None of these companies besides McDonald's has reported their most recent quarterly earnings. Walmart and Target will release their numbers in mid-November, with Dollar General's due in early December. Obviously, nobody knows for sure what's in the cards.
Investors are still seeing the same bigger-picture theme in McDonald's third-quarter results that they've been seeing for the better part of 2023, however. That is, consumers aren't outright refusing to spend, but they are spending selectively in an effort to conserve dollars. As Kempczinski put it, "It's clear that consumers continue to be more discriminating about what and where they spend."
That ultimately works against Target and -- ironically -- against value-minded Dollar General. It works particularly in favor of Walmart, which offers the value that shoppers want and the groceries they have to have.
Of course, consumer spending's uneven growth and still-rising inflation impact all consumer-facing companies. Your job as an investor is just figuring out how it impacts a particular organization's bottom line. It could hurt. Or, it might actually help.
