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Jan 27, 2022

McDonald’s falls after profit hit by labor, commodity costs

McDonald's

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McDonald’s Corp. shares slumped after earnings for the fourth quarter came in below estimates, weighed down by staffing struggles and supply-chain snags.

The burger chain said Thursday that profit excluding some items was US$2.23 a share last quarter, below the average analyst estimate of US$2.34. Operations are being hurt by pandemic restrictions in key markets such as China, Germany and France, on top of significant cost increases.

Across the restaurant industry, results have been tempered by inflationary pressures for ingredients and a stubborn shortage of workers. McDonald’s, like its competitors, is struggling to attract and keep staff -- especially as the omicron variant forces more employee quarantines. 

“A surge in COVID-19 cases and a return of restrictions in many of our markets are creating uncertainty around the world exacerbating labor shortages and supply chain delays,” Chief Executive Officer Chris Kempczinski said on a conference call. “Rising consumer inflation levels are putting pressure on restaurant economics.” 

Kempczinski sees further pressure on U.S. wages this year with omicron worsening what was already a challenging staffing environment.

Higher labor and commodity costs “more than offset” sales growth for company-owned stores in the U.S., McDonald’s said in a filing. The shares slipped 0.6 per cent at 10:01 a.m. New York time. The stock had gained 16 per cent in the 12 months through Wednesday’s close, outpacing the 13 per cent advance of the S&P 500.

COVID-19 restrictions caused some dining-room closures in the quarter, and certain locations have shifted to takeout or drive-thru service only. Chinese comparable sales were negative because of virus outbreaks there, McDonald’s said.

Higher labor and commodity costs are also taking a toll on margins. McDonald’s expects its operating margin in 2022 to be in the low- to mid-40 per cent range, compared with 43.4 per cent last year, excluding some items.

Comparable sales -- a key metric for gauging restaurant success -- grew 12.3 per cent in the fourth quarter, compared to analysts’ estimate for a gain of 10.7 per cent. By the same measure, the results also beat estimates for the U.S. and international developmental markets, which include nations in Asia and Latin America.

The Chicago-based company said U.S. sales were boosted by “strategic menu price increases,” its loyalty program, and promotions on items such as the McRib and Crispy Chicken Sandwich. While McDonald’s is benefiting from its strong drive-thru presence, service times slowed last year in the U.S. compared with 2020, the company said.

McDonald’s is focused on increasing its market share in chicken. Costs are rising especially for proteins, and other companies have reported struggles in getting sufficient supplies.

The burger chain plans to open more than 1,800 restaurants globally this year and sees capital spending in the range of US$2.2 billion to US$2.4 billion.