McDonald’s and Chipotle Revealed as Winners and Losers in Latest Restaurant Earnings

The second quarter proved to be a defining period for restaurant companies, with some emerging as winners and others as losers. Two key factors influenced their performance: menu prices and customer behavior. While some chains experienced alienation from diners due to higher prices, others saw no change in consumer behavior despite increasing costs. Promotions played a crucial role in driving customers either to specific restaurants or failing to make an impact. Additionally, low-income customers exhibited varying preferences in terms of restaurant visits.

Foot traffic to restaurants has generally declined, resulting in slower sales growth. Many eateries have refrained from implementing further price hikes, which had previously driven strong revenue. As customers become more selective with their spending, including where they choose to dine, a distinct divide in chain performance has emerged.

Although many restaurant companies surpassed earnings expectations, some fell short of Wall Street’s revenue estimates for the quarter. Notably, McDonald’s and Wingstop reported impressive second-quarter earnings, revenue, and same-store sales growth that exceeded analysts’ expectations. On the other hand, Papa John’s, Wendy’s, and Chipotle Mexican Grill were among the companies disappointing investors with weaker-than-anticipated sales.

Three dominant trends shaped the quarter and influenced the success or failure of restaurant companies:

Same-store sales growth for companies hinges on two metrics: average customer spending per order and frequency of restaurant visits. With eateries delaying price hikes and customers becoming more conscious of their budgets, traffic becomes a vital factor in boosting same-store sales. Consequently, investors closely monitor traffic as an indicator of a restaurant’s health.

McDonald’s, Chipotle, Texas Roadhouse, and Wingstop were among the few chains that reported traffic growth in the U.S. during the latest quarter. Conversely, Restaurant Brands International experienced a decline in traffic for three of its chains: Popeyes, Burger King, and Firehouse Subs. Wendy’s also reported a 1% decline in domestic transactions for the quarter.

Looking ahead, traffic may continue to decline in the second half of the year. Barclays analyst Jeffrey Bernstein believes that menu pricing will decrease rapidly as inflation no longer justifies higher prices. Without a significant rebound in traffic, comparable sales are likely to decline, potentially affecting restaurant stocks in the coming months.

Although inflation is cooling and economists predict a “soft landing,” consumers still prioritize value. The fast-food sector has benefited from consumers trading down from fast-casual establishments to more affordable options like burgers and tacos. However, the perception of value varies across chains.

For instance, McDonald’s has performed well among consumers earning less than $100,000, including those with incomes under $45,000. Conversely, Wendy’s noticed a pullback in purchases from diners earning less than $75,000. Wingstop, on the other hand, has seen an improvement in customers’ perception of its value, which coincided with declining chicken wing prices.

Chipotle has experienced a favorable perception of value among diners, particularly with its burrito bowls. The chain has witnessed low-income consumers returning to its restaurants compared to the previous year. However, these customers are not visiting as frequently as before due to inflation. While Chipotle has temporarily halted price increases, a decision on whether to raise them again will be made closer to the fourth quarter.

In contrast, Noodles & Company struggled with consumers’ perception of value. The chain faced double-digit declines in traffic when customers resisted higher prices. In response, Noodles reduced prices by 3% and shifted its marketing strategy to emphasize value.

In the pursuit of value, restaurants have relied on discounts, combo meals, and limited-time menu items to attract customers. While some promotions successfully boosted sales, others failed to offset weaknesses.

McDonald’s stood out with its Grimace Birthday Meal promotion, which generated social media buzz and increased restaurant traffic. However, not all promotions yielded the desired results. Papa John’s, for example, released Doritos Cool Ranch-flavored Papadias, which created buzz and traffic but couldn’t compete with the success of the chain’s previous stuffed crust pizza offering.

Overall, understanding customer behavior and adapting strategies to provide value will be crucial for restaurant companies in navigating the challenges of the current landscape.