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McDonald's (MCD +4%) is trading higher despite a pretty rough quarter. The company missed on adjusted EPS and has now reported back-to-back EPS misses for the first time since Q1-Q2 of 2020, at the start of the pandemic. Revenue ticked lower 0.1% yr/yr to $6.49 bln, which was below analyst expectations. This was MCD's first yr/yr top line revenue decrease since 4Q22.

• The company was candid on the call. MCD had cautioned since last year of a more discriminating consumer particularly among lower income households. As this year has progressed, those pressures have deepened and broadened. Consumers are much more discretionary. People are eating at home more often.
• The QSR sector has meaningfully slowed in the majority of MCD's markets and industry traffic has declined in major markets like the US, Australia, Canada, and Germany. Also, several markets continue to be negatively impacted by the war in the Middle East. Overall, MCD expects customers will continue to feel the pinch of the economy and a higher cost of living for at least the next several quarters in this very competitive landscape.
• Global comp sales came in at -1.0%, down from +1.9% in Q1 and +3.4% in Q4 while US comps were -0.7%, down from +2.5% in Q1 and +4.3% in Q4. The US comp decline was driven by negative comparable guest counts, partly offset by average check growth due to strategic menu price increases. In fairness, MCD was lapping robust +10.3% US comps in Q2 of last year, but it was still pretty shocking to see negative US comps.
• Outside of the US, International Operated Markets (IOM) comps fell -1.1%, impacted by negative comps across a number of markets, driven by France. On the call, MCD noted weakness with lower income households, but also singled out larger cohorts, including families in Europe eating at home more. International Developmental Licensed (IDL) comps were also lower at -1.3%, hurt by war and negative comps in China more than offset positive comps in Latin America and Japan.
• A big theme on the call was MCD saying it needs to focus more on value offerings. While consumers still recognize MCD as the value leader vs key competitors, MCD conceded that its value leadership gap has recently shrunk and it's working to fix that.
• Specifically, MCD has seen a lot of enthusiasm for its $5 value meal deal, which has produced sales above expectations. It has been most popular with lower income consumers and the $5 deal has improved sentiment towards the McDonald's brand in terms of value and affordability. To date, 93% of MCD restaurants in the US have committed to extending the $5 offer even further into the summer. Other ways to provide value is a steady stream of offers on the mobile app.

Overall, we are a bit surprised to see shares trade higher following what was a historically weak quarter for MCD. We cannot remember the last time MCD missed on the top and bottom lines and reported negative comps at all segments. We think the stock is higher because a lot of negativity was priced in already. Shares have fallen 17% since mid-January. Also, we think investors are pleased to hear MCD focus more on value. This Q2 result seems to have shaken MCD up and has lit a fire under them to focus more on value. A knock on MCD has been that it was slow to match competitors on value as its prices have gotten expensive. Investors seem to be reacting positively to MCD's renewed focus on value.