Is McDonald's Recession Proof? Consumers Say Yes To Value Menu And No To 'Would You Like Fries With That?'

McDonald’s Corporation MCD has surged almost 6% since printing its second-quarter financial results on Tuesday before the market open.

The fast food giant printed mixed results, reporting EPS of $2.55 compared to the analyst consensus estimate of $2.47. McDonald’s missed on revenues, reporting a 3% drop in sales from the same period last year to $5.72 billion, which missed the consensus estimate of $5.82 billion.

For the second quarter, McDonald’s showed strong growth in France, Germany, Brazil and Japan, but in China, ongoing COVID-19 restrictions and lockdowns hurt the company’s top line. Temporarily shut-down restaurants in Ukraine also brought McDonald’s revenues lower.

Why It Matters: In the U.S., amid soaring inflation and rising interest rates, McDonald’s was able to grow its sales modestly by hiking prices on some of its menu items. The increase in prices has caused customers, especially those from low-income households, to switch to McDonald’s value menu and order fewer combos, while visiting less frequently.

With the cost of groceries rising more sharply than menu items at restaurants, McDonald’s executive Chris Kempczinski expects to see the restaurant benefit, however. Over the last 12 months, inflation has caused the average price of grocery items to soar 12.2%, while menu items at restaurants have risen 7.7% over the same time period.

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What’s Next: Despite McDonald’s offering less-expensive food than many other restaurants and perhaps even a cheaper option than eating at home, soaring inflation and rising interest rates has caused consumers to think carefully about their spending. While McDonald’s may fare well through a slowing economic landscape, other more expensive quick service restaurants may suffer.

The full scope of how the current economic situation is affecting the restaurant sector will become clearer next week after Starbucks Corporation SBUX and KFC, Pizza Hut and Taco Bell parent Yum! Brands, Inc YUM report their earnings on Aug. 2 and Aug.3, respectively.