McDonald's (MCD) Stock Rises Despite Earnings Miss as E. Coli Impact Proves Less Severe Than Expected

McDonald's is trading higher today, despite missing fourth-quarter earnings and revenue estimates, as investors take comfort in the fact that the impact of its recent E. coli outbreak was not as severe as initially feared.

While the fast-food giant faced headwinds in its U.S. market, its global comparable sales returned to positive territory, signaling early signs of stabilization in key international regions.

Earnings and Revenue Miss, but Market Responds Positively

McDonald's reported an earnings miss for the fourth quarter, alongside a modest revenue shortfall. However, the market’s reaction has been largely positive, with the stock climbing above $300 per share. The key reason behind this optimism is that the worst-case scenario related to the E. coli outbreak in McDonald's Quarter Pounders did not materialize.

Historically, food safety incidents can have a lingering effect on consumer behavior, often leading to prolonged traffic declines. In this case, while U.S. comps were negative, they were not as dire as some had feared, and management noted that recovery has already begun.

Global Comparable Sales Rebound

A significant positive takeaway from the report is that global comparable sales came in at 0.4 percent, marking a return to positive growth after two consecutive quarters of negative comps. This reversal is particularly noteworthy as McDonald's was facing a difficult comparison to the fourth quarter of 2023 when it posted 3.4 percent comparable sales growth.

Performance across individual markets was mixed, with some regions showing stronger-than-expected rebounds while others continued to struggle.

- The International Developmental Licensed (IDL) segment was a bright spot, posting a 4.1 percent gain in comparable sales. This growth was driven largely by strong performance in the Middle East and Japan. In the Middle East, McDonald's benefited from lapping the disruption caused by geopolitical events that began in late 2023. Meanwhile, China is showing early signs of stabilization, an encouraging development given the country's economic struggles over the past year.

- U.K. sales remained under pressure, reflecting continued weakness in consumer spending across the region. The quick-service restaurant (QSR) industry saw positive traffic growth in only two of McDonald's five largest markets, indicating ongoing global consumer headwinds.

U.S. Market Impacted, but Signs of Recovery Emerge

In the U.S., comparable sales declined 1.4 percent in the fourth quarter, a drop from the slight 0.3 percent growth seen in the previous quarter. However, given the E. coli outbreak and broader consumer spending pressures, many investors were bracing for an even steeper decline.

McDonald's reported that sales trends improved throughout the quarter, hitting a low in early November before showing steady sequential improvement. This momentum has carried into the first quarter of 2025, and management now expects a full recovery in U.S. performance by the beginning of the second quarter.

While the E. coli outbreak was a short-term disruption, McDonald's remains focused on addressing broader consumer spending pressures. Lower-income consumers and families, particularly in Europe, continue to be more cautious with their spending, a trend that has persisted throughout the past year.

McValue Menu Strategy Gaining Traction

To combat softer consumer demand, McDonald's has been leaning more heavily on value-driven promotions. The introduction of the McValue Menu has played a key role in attracting price-sensitive customers while also driving higher average checks.

- The $5 meal deal, which launched earlier this year, has been a significant driver of foot traffic.

- The menu now includes a Buy One, Add One for $1 option, expanding to include breakfast items.

- Additional app-exclusive offers are helping McDonald's push digital engagement and boost mobile ordering.

- The campaign has received strong promotional support, with wrestler and actor John Cena serving as the face of the campaign.

Management noted that while the $5 meal deal is designed as a budget-friendly option, it is also prompting additional spending. The average check for customers purchasing the $5 meal deal is over $10, meaning the promotion is succeeding in both driving affordability and increasing overall sales.

Key Takeaways for Investors

Despite an earnings and revenue miss, McDonald's stock is up for several key reasons:

1. The E. coli outbreak had a smaller-than-expected impact – While U.S. comps were negative, they were not as bad as feared, and sales trends improved sequentially through the quarter. The company expects a full recovery by early Q2.

2. Global comparable sales returned to positive territory – After two quarters of declines, comps rebounded, with strong contributions from the Middle East and Japan.

3. Early signs of stabilization in China – Given China’s struggles with economic growth, any sign of improvement in this critical market is encouraging.

4. The McValue Menu is proving effective – The value-driven strategy is successfully attracting budget-conscious consumers while driving higher average ticket sizes.

Looking Ahead: A Consumer-Driven Recovery

While McDonald's still faces challenges, particularly with inflationary pressures on lower-income consumers, its ability to adapt with strategic pricing and promotions is giving investors confidence. The company’s recovery trajectory appears to be on track, and its ability to navigate macroeconomic headwinds will be key in sustaining its recent momentum.

Moving forward, McDonald's focus will likely remain on driving traffic through affordability while maintaining strong digital engagement. With the E. coli outbreak largely in the rearview mirror and global comps back in positive territory, investors now have more reasons to be optimistic about the company's long-term growth.