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McDonald's (MCD) is trading roughly flat after reporting mostly in-line Q1 results this morning. The real shocker was that US comps declined -3.6%, its worst comp number of any quarter since the pandemic. The main reason is that lower income consumers are constrained and nervous about their near term outlook.

• Global comps came in at -1.0%, a decline from +0.4% in Q4. MCD has now reported negative global comps in three of the past four quarters, which is a bit concerning (-1.5% in Q3 and -1.0% in Q2). MCD was lapping a decent +1.9% global comp in 1Q24 but it is still a sign of a weak consumer not just in the US but globally. Industry traffic fell more than anticipated in several of its large markets, including the US.
• Turning to US comps, it was rough at -3.6%. Overall QSR industry traffic from low income consumers was down nearly double digits yr/yr. Unlike a few months ago, QSR traffic from middle income consumers also fell nearly as much, which MCD sees as a clear indication that the economic pressure on traffic has broadened. Traffic growth from higher income consumers remains solid. It's clear that low and middle income consumers are being weighed down by inflation and heightened anxiety.
• In response, MCD plans to keep focusing on value. It now has EDAP (everyday affordable price) menus and EDAP $5 meal bundles in each of its big five markets. In early January in the US, MCD launched its McValue platform, which is a new branded equity similar to the Saver menu in the UK and the Loose Change menu in Australia, both of which have been in place for over 10 years.
• In terms of menu and promotions, MCD is encouraged by the consumer response to its Minecraft movie campaign. Also, MCD is excited about some new menu items, including the nationwide launch of McCrispy Chicken strips in the US.

Investors seem to be taking the rough US comp number in stride, which surprises us a bit. It seems investors were prepared for a weak result in Q1. We also think the overall strong market today ius helping MCD shares. Looking ahead, MCD will be lapping negative yr/yr global comps in the next two quarters, which may help comps. Another positive is that MCD believes its guest count and market share performance will improve from the Q1 low point, driven by its emphasis on value.