Earnings Call Transcript - MCD Q2 2024

Operator, Operator

Hello and welcome to McDonald's Second Quarter 2024 Investor Conference Call. At the request of McDonald's Corporation, this conference is being recorded. Following today's presentation, there will be a question-and-answer session for investors. I would now like to turn the conference over to Mr. Mike Cieplak, Investor Relations Officer for McDonald's Corporation. Mr. Cieplak, you may begin.

Mike Cieplak, Investor Relations Officer

Good morning, everyone, and thank you for joining us. With me on the call today are Chairman and Chief Executive Officer, Chris Kempczinski; Chief Financial Officer, Ian Borden, and President of McDonald's USA, Joe Erlinger. As a reminder, the forward-looking statements in our earnings release and 8-K filing also apply to our comments on the call today. Both of those documents are available on our website, as are reconciliations of any non-GAAP financial measures mentioned on today's call along with their corresponding GAAP measures. Following prepared remarks this morning, we will take your questions. Please limit yourself to one question and then re-enter the queue for any additional questions. Today's conference call is being webcast and is also being recorded for replay via our website. And now I'll turn it over to Chris.

Chris Kempczinski, CEO

Thanks, Mike, and good morning, everyone. Beginning last year, we warned of a more discriminating consumer, particularly among lower-income households. As this year progressed, those pressures have deepened and broadened. The QSR sector has meaningfully slowed in the majority of our markets, and industry traffic has declined in major markets like the US, Australia, Canada, and Germany. In several markets, we also continue to be negatively impacted by the war in the Middle East. These external pressures certainly weighed on our performance for the quarter, with declines in comparable sales globally and across each of our segments. But there were also factors within our control that contributed to our underperformance, most notably our value execution. For 70 years, McDonald's has defined value in our industry, and we are taking meaningful actions across the world to assert our leadership. The hallmark of a great company is its ability to perform in good times and bad, and we are resolved to reignite share growth in all our major markets, regardless of the prevailing market conditions. This won't happen overnight, but it will happen. The unique competitive advantages of McDonald's afford us many levers to pull, and we have the financial wherewithal to sustain our investments as needed. One area of strength is our restaurant teams who continue to execute with excellence to serve our customers and local communities, creating a better customer experience that has delivered operational improvements, improved service times, and increased customer satisfaction across most of our major markets. This relentless focus on execution will give customers more reasons to visit our restaurants more frequently. Leading into the power of our core menu also leads to outstanding execution in our kitchens. Our deployment of Best Burger is a great example of this. Now deployed in over 80% of markets, the training and focus on the basics ensures we deliver the gold standard product our customers expect, which is driving elevated taste and quality perceptions. We remain on track to have Best Burger deployed in nearly all markets by the end of 2026. As we announced late last year, we continue to innovate across our core menu to address unmet customer needs with a more satiating burger that will provide great value for money. This new burger, which we're piloting across three international markets this year, includes two beef patties perfectly layered with melting cheese, crispy toppings, and a tangy McDonald's sauce. It's a quintessential McDonald's burger with a twist on our iconic familiar flavors, named The Big Arch. We plan to test and learn through the end of the year to gather insights before scaling more broadly internationally. We continue to have a significant opportunity for growth in chicken, a category that's twice the size of beef globally and growing at a faster rate. By featuring our beloved icons like McNuggets and McChicken while driving growth in emerging favorites like McCrispy and McSpicy, our chicken sales are now on par with beef sales. The McCrispy Chicken sandwich is now offered in more than 55 of our markets around the globe, and through our plans to further expand our McCrispy equity, we will continue to capture chicken market share. Our digital penetration also continues to grow. Loyalty membership has now reached 166 million members, pacing ahead of expectations as we work towards our ambition of 250 million members, and identified users now represent 25% of system-wide sales. We know that engaged loyalty customers spend more and visit more often. As a result, we're driving digital market share gains and continuing to build on our understanding of customer preferences, personalization, and behaviors. But as I said in my opening, we recognize that in several large markets, including the US, we have an opportunity to improve our value execution. Consumers still recognize us as the value leader versus our key competitors, but it's clear that our value leadership gap has recently shrunk. We are working to fix that with pace. Over the last several years, our system has sustained significant inflationary cost increases ranging from 20% to 40%, depending on the market. As we absorb these cost increases in partnership with our franchisees, we look for ways to protect restaurant profitability via productivity efforts and selective price increases. These price increases disrupted long-running value programs and led consumers to reconsider their buying habits. In some markets like Germany, Spain, and Poland, the flexibility of their value programs like McSmart has allowed them to quickly make adjustments that were embraced by consumers and drove market share gains. In other markets like the US with their $1 $2 $3 value program, a more comprehensive rethink has been required. Our US President, Joe Erlinger, is on the call and will share more about our plans in just a minute. The point is, we know how to do this. We wrote the playbook on value, and we are working with our franchisees to make the necessary adjustments. McDonald's competitive strengths are formidable and growing. Our brand is as strong as ever. Yet again, Kantar recognized McDonald's as the world's fifth most valuable brand and the number one most valuable non-tech brand. We're executing with excellence, and our restaurant operations are an area of strength. Our digital footprint within the industry is unmatched and growing as we build one of the world's largest loyalty programs, and we're flexing our investment muscle to accelerate new restaurant openings as we also build consumer restaurant and company technology platforms that will drive cost efficiencies and accelerate innovation. We do not take these advantages for granted, however, and we are committed to delivering for our customers and shareholders every day. Where our customers tell us we have value opportunities, we will address them. Listening to customers and staying agile led to the development of our Accelerating the Arches strategy, and I'm confident that it remains the right playbook for our business. Continued focus on gold standard execution and our growth pillars are the right actions to grow market share and return to restaurant traffic growth. To share more on the US segment, I'll now hand it over to Joe.

Joe Erlinger, President of McDonald's USA

Thanks, Chris, and good morning. It's been a few years since I've participated in the McDonald's earnings call. I want to start by reflecting a bit on the progress McDonald's USA has achieved since that call back in 2021. Over the past three years, we've significantly moved the needle in several areas, like loyalty, which has grown to over 20% of our US system-wide sales and over 37 million 90-day active users. We've also improved our chicken market share with the launch of McCrispy. As I said then, it was the accumulation of our decisions grounded in our values that continue to keep the McDonald's brand relevant for our customers, and meaningful for our people, providing a strong foundation for future growth. That continues to be our approach as we're now focused on raising the bar on our customer experience, considering our customers' current reality. Since the very beginning, and Chris touched on this earlier, we've earned our success through excellent QSC&V, quality, service, cleanliness, and value. As we've evolved our approach time and again over the years to match the changing expectations of our customers, we continue to deliver an exceptional customer experience today. In this last quarter, McDonald's USA delivered its highest-ever year-to-date customer satisfaction score. While I'll share more about the $5 meal deal in a moment, both the Bacon Cajun Ranch McCrispy and Grandma McFlurry promotions drove sales, along with cultural buzz and brand relevance. All said, our business performance reflects industry-wide challenges and current context, one where customers are making thoughtful choices about when and where they eat. While we always work hard to provide value to our customers, they're telling us that they want to see and experience even more value from McDonald's. We're listening as we remain laser-focused on providing great value to our fans this summer and beyond. So we tapped into ideas that already exist within our system. Our restaurants in Upstate New York have been running a local $5 meal deal that was highly successful, performing well with lower-income customers and driving overall incremental sales. By leveraging learnings from within our own system, we brought this to life for customers across the US. We've seen a lot of enthusiasm and the number of $5 meal deals sold are above expectations. Trial rates of the deal are highest amongst lower-income consumers, and sentiment towards the brand around value and affordability has begun to shift positively. To date, 93% of our restaurants in the US have committed to extending the offer even further into the summer. There are other ways customers can experience great value at McDonald's. We continue to provide a steady stream of offers on the mobile app, including nationwide Free Fries Fridays, where you can get a free medium fry every Friday with any $1 purchase on the app. As we work through the important details of the future US value platform, we will continue to make decisions grounded in insights with the customer at the center. At the end of the day, we expect 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. We believe it's critical for us to consider these factors to grow market share and return to sustainable guest count-led growth for the brand. McDonald's is uniquely positioned to succeed in this environment, given our size, scale, and competitive advantages. We have a fully modernized restaurant estate. We have a simplified menu that focuses on our core while never shying away from bringing back fan favorites at the right times or pursuing the right new product innovations. We have built one of the largest loyalty programs in the industry and we're continuing to lead with a long-term mindset, making decisions that meet our customers where they are and where they need us right down, while also plotting a path for sustained success. Now I'll turn it over to Ian.

Ian Borden, CFO

Thanks, Joe, and good morning, everyone. As Chris mentioned at the top of the call, despite the very real near-term challenges facing the sector, we remain confident that our long-term strategy rooted in customer insights and built on our inherent competitive advantages is right for our business. When we combine deep insights with the power of our brand, we tap into what our customers love most about McDonald's, connecting with them on an emotional level through celebrating the rituals and memories that make our brand so special. At the heart of our brand are our local communities and the customers we serve each and every day. Strong restaurant level execution against our M, C, and D's will be critical to giving customers more reasons to visit McDonald's more often. As you heard from Chris and Joe, we're delivering higher customer satisfaction and improved service times across most of our major markets. Our M, C, and D's are deeply interconnected and it's at the intersection of our growth drivers that we continue to deepen our relationships with customers and create a consistent and enjoyable restaurant experience while offering the delicious and affordable food they love. As Chris mentioned, we still have an opportunity to strengthen our holistic value proposition across markets. We recently met with each of our largest markets, ensuring that we have a winning value offering front and center in every discussion. We're taking a forensic approach to evaluating our offerings and acting with urgency and agility to implement solutions that deliver against customer expectations. Germany has continued their holistic approach to value with a 360-degree affordability strategy, including McSmart at the center, and consistently driving elevated levels of customer awareness. This is a best-in-class example of listening to the customer, designing a program that meets them where they are and ultimately delivering incremental sales, customer satisfaction, and market share gains. As we scale best practices across the system, markets like France and Australia have adopted their own version of the McSmart platform, and early results have been encouraging. In May, the UK offered smaller, more affordable bundles of their own with their 3 for GBP3 mix and match menu that resonated with customers looking for more affordable options. To address an opportunity to offer more compelling value at breakfast, which remains the fastest-growing day part in the market, the Canadian market recently launched a new price point beverage value offering our customers the coffee they love every day starting at just $1. McDonald's has long been an affordable destination for communities to come together and share a meal, but it's always been about more than just price. This quarter, we continued to elevate the experience, combining our delicious food with unique mobile app and in-restaurant experiences, ultimately delivering value however and whenever customers decided to order and enjoy their McDonald's favorites. Germany leaned into the Easter holiday with a fun and interactive calendar promotion where customers enjoyed a daily deal available exclusively in the mobile app from discounts on our most iconic menu items like the Big Mac or Chicken McNuggets to unique meal deals. The promotion drove remarkable engagement and significant growth in loyalty sales. Italy drove traffic to our restaurants with summer days, a similar seasonal calendar campaign featuring a variety of exciting meal bundles. A local favorite, the frequent fryer program, returned to the Canadian market this quarter. To engage loyalty members with a new approach to gamification, the market launched a nationwide scavenger hunt for fry icons, which could then be entered on the mobile app for free loyalty points or free fries. Nearly 3.5 million codes were entered throughout the promotion, driving meaningful lifts to the fry category. Even with strong execution against our Accelerating the Arches growth drivers, performance this quarter reflects a pressured industry landscape in the US and across many of our largest international markets. Our international operated market comps were negative, reflective of this broad-based pressure where customers continue to be more intentional with the dollars they spend. Performance in France and our IDL segment, positive comp sales in Latin America and Japan were offset by the impact from the ongoing war in the Middle East and a less confident consumer in China. Despite the pressured top line growth we've discussed this morning, we drove adjusted earnings per share of $2.97 for the quarter, a decrease compared to the prior year of about 5% in constant currencies. This was primarily due to a higher effective tax rate of nearly 21% for the quarter, elevated interest expense as expected, and less other non-operating income due partially to lower interest income. Top line results generated over $3.5 billion of restaurant margins for the quarter and a year-to-date adjusted operating margin of over 46%, highlighting the durability of our business model. This was offset by higher G&A due to continued investments in digital and technology as well as enterprise transformation efforts and costs associated with our biennial worldwide convention. As we've talked about before, driving long-term growth requires making the right strategic and forward-looking investments, and we are committed to continuing to invest in our platforms and growth drivers while relentlessly prioritizing current year run the business spend. While we expect industry challenges to persist, we believe we are well positioned with the unique size and scale that only the McDonald's system can provide. There remains significant power in focusing on what's within our control, offering our customers delicious food at unparalleled value and convenience that will drive future market share gains and guest count growth. With this as our North Star, we believe we're poised to deliver long-term growth for our system and our shareholders. As most of you know, this is Mike's last earnings call with McDonald's. Before I close, I'd like to take a moment to personally thank Mike for his significant contributions to our brand. He served as a trusted adviser to our senior leadership team by playing a key role in developing and communicating our strategy. Mike has been at McDonald's almost as long as I have and his deep knowledge of our business and ability to foster relationships with stakeholders has been invaluable to me, especially as I've taken on the role as CFO. On behalf of everyone at McDonald's, Mike, thank you. We wish you all the best for the future. And with that, I'll turn it back over to Chris.

Chris Kempczinski, CEO

Thanks, Ian. Earlier this month, we brought leaders together to discuss our goals and objectives as we further establish McDonald's as a leading global consumer brand. As a team, we are committed to act with urgency, cementing our value leadership, growing share in areas like chicken and bolstering loyalty through digital customer acquisition, adoption, and retention on a global scale. We are continuing to lean into our three pillars, M, C, and D, as our blueprint and engine for growth while leveraging technology to transform how we operate across all platforms. Even as the world around us continues to change, we know the power of the McDonald's brand will prevail. We're digital-forward, values-driven, and culture-led and will continue to reinvent ourselves to meet our customers and restaurant teams where they are today and where they're going tomorrow. With more than 40,000 locations across the globe, we uphold a presence that we believe few in our industry could ever hope to match. We offer the best franchising opportunity in the world, providing a familiar beacon of support for the over 40,000 communities where we live, work, and serve. We're just getting started. We're making progress toward our ambition of 50,000 restaurants by the end of 2027. When we combine our strategy with great value and high-level execution, we are confident we will further our leadership position. As I close, I want to extend a sincere thank you to our franchisees, suppliers, and employees around the world for their continued resilience and unwavering commitment to serving our customers and local communities. And with that, we'll begin Q&A.

Operator, Operator

Thank you.

Mike Cieplak, Investor Relations Officer

Our first question is from John Ivankoe with JPMorgan.

John Ivankoe, Analyst

Hi. Thank you very much. Certainly, McDonald's has access to consumer data, consumer information that almost no corporation in the world does. When I consider six months ago, 12 months ago, it was fairly well known that the restaurant industry would see a fairly wide pricing gap versus grocery, and many consumers would have drawn down their excess savings from COVID, that we would be in an environment where value, quite frankly, would be more necessary. I wanted to get a sense of really what changed so significantly from the consumer's perspective relative to your expectations in the last 6 to 12 months? If I can, how McDonald's pivots itself from being reactionary from a value perspective to anticipating changing needs before they happen as opposed to after? Thank you so much.

Chris Kempczinski, CEO

Hi, John. Thanks for the question. You're right in that last year, you may remember we were talking about there being pressure on the consumer, particularly that low-income consumer, which was notable in a few of our major markets. What has happened in the intervening period is that we've seen more markets experience the same sort of slowdown. It is certainly most pronounced with that low-income consumer, but we're also seeing an impact with larger groups, particularly around families in Europe, as they are just looking to economize. You're also right about the continued gap between food at home and food away from home inflation. The gap is about 3% right now, or a 300 basis point gap between the two. You are seeing consumers becoming much more discretionary as they treat restaurants. The consumer is eating at home more often, seeking out deals, and we are experiencing a trade down with either units per transaction or within the mix; all of those are indicators that consumers in a number of these markets are being very discriminating. Consumer sentiment in most of our major markets remains low. Regarding how we anticipate where these customers are going and what value is required, I think that's a fair question. In several markets, you've seen us talk about McSmart, and McSaver, as well as improvements we've made in the US.

Mike Cieplak, Investor Relations Officer

Our next question is from David Palmer with Evercore.

David Palmer, Analyst

Thanks. Congratulations, Mike. Thank you for your help all through the years. As for the question, I'd like to focus on the IOM countries. How do the challenges in your key markets differ from the US in terms of market share versus the informal eating out sales trends? In the US, it feels like McDonald's is still in a state of searching and perhaps negotiating to find the right value message ahead of menu news that might happen later. Are you at a similar stage of negotiating with franchisees about value overseas? Where are you in terms of how satisfied you are with your value message? Thanks so much.

Chris Kempczinski, CEO

Yes. Thanks, David. I'll have Ian start, and then if there's anything I need to add, I'll do that. But Ian, I'll let you start.

Ian Borden, CFO

Sure. Good morning, David. Thanks for the question. I'll start with a bit of context, which is as you heard Chris in his opening remarks, the pressures on the industry and consumers that we're seeing are broad-based in nature. Looking across our IOM markets, historically, there have been real strengths for our system. The external pressure has heightened and become more significant in several of those markets through the second quarter. It's still what I'll call an evolving situation. We've talked a lot about value and affordability over the last couple of quarters, highlighting McSmart, which is an entry-level affordable meal option we put in place in Germany at the beginning of 2023. Germany has been consistently one of our strongest-performing markets even in a more difficult context over the last couple of quarters. Part of the evolution is just what's happening with the consumer; consumers are changing, and those platforms and offers have needed to be sharpened, better positioned for the current context. We are moving with the speed and pace, but the environment has been changing, and we're just trying to get ahead of it. We've had strong alignment and engagement with franchisees across our international markets and are working collaboratively to get the right programs in place for value and affordability.

Chris Kempczinski, CEO

What I would add is that looking at our IOM markets, the good news is if you think about Germany with McSmart, Canada with McPick, the UK with McSavers menu, Australia has McSmart, and France has McSmart. We have the value platform established in those markets, and there's good consumer awareness of those value platforms. The work underway is making sure that underneath those value platforms, we have the right items at the right price points to reflect where the market is today. There are markets like the UK and France, where they're making changes to the menu, and they're adding new offerings, so there are changes happening to make sure we are appropriately positioned for the market context.

Mike Cieplak, Investor Relations Officer

Our next question is from Brian Harbour with Morgan Stanley.

Brian Harbour, Analyst

Yes. Thank you. Good morning. I had a question on digital. Obviously, it continues to grow. You've continued to add members, and there's a lot of good value available on that platform, but it hasn't really offset some of the sales challenges you're seeing. What gives you confidence that that could change? What do you think needs to be done differently? Do you think it's resonating, and is that a place to continue to drive value?

Chris Kempczinski, CEO

Yes, it's a great question. We feel really good about our digital business and are seeing strong performance on the digital front. I think the challenge right now is that only about 25% of our customers are on digital in terms of identified customers. To drive the overall business, we do not have enough digital engagement to shift sales. Some of what has happened is we were a little over-rotated on digital versus broad everyday value that is available to all consumers, including those who aren't on our digital platform. So that's the work underway. We believe that digital will grow, and in a couple of years, particularly as you get to 250 million users, that's a different conversation.

Mike Cieplak, Investor Relations Officer

Our next question is from David Tarantino with Baird.

David Tarantino, Analyst

Hi. Good morning. A couple of questions on the US value initiatives. First, could you elaborate on the effectiveness of the $5 meal deal and whether you're seeing the sales or traffic inflection you had anticipated from that program? Secondly, Chris, you mentioned it's necessary to have more of a platform idea in all of your key markets. In the US, how are those conversations progressing with franchisees, and do they support a broader national value platform? When might that happen? Thanks.

Chris Kempczinski, CEO

Thanks, David. I appreciate the questions. The $5 meal deal has performed and done exactly what we wanted it to do. First, we wanted to see a change in improved brand perceptions around value and affordability, and it's done that. We wanted to connect with the single-user, especially the lower income consumer. We've seen increasing trial rates by that consumer base. Our two lowest income cohorts, under $45,000 and $45,000 to $75,000, saw increases in trial and participation around the $5 meal deal, which is incredibly encouraging. We wanted to see a shift in guest counts to drive both short- and long-term health of the business, and while that’s begun, it hasn’t yet translated into sales. The average check, though, has been over $10 for the $5 meal deal, so we feel comfortable about the add-on happening as part of that program. Regarding the longer-term platform, this is a big investment for us and our franchisees. The dollar menu existed for over 10 years, and Dollar Menu 1, 2, 3 has been in place for over six years; we need to be thoughtful about what our national everyday value platform will look like. That work is ongoing with good partnerships with our franchisees. In the meantime, we are continuing to offer consumers great value with the $5 meal deal extending in 93% of our restaurants into August.

Mike Cieplak, Investor Relations Officer

Our next question is from Sara Senatore with Bank of America.

Sara Senatore, Analyst

Great. Thank you. I wanted to ask about margin implications. In particular, I'm curious whether you'll need additional franchisee support for either the US or IOM, as you seem to be seeing some deflation in some beef and other cuts, which is different from what we've observed in previous quarters. If you're offering more value or have a permanent value platform, is some of that funded by lower input costs so that there is less margin pressure, or will this need to be addressed with franchisees? Is there any contemplation of investing either behind franchisees or contributing to the marketing fund? Anything from McDonald's corporate to help lessen the burden? Thanks.

Ian Borden, CFO

Good morning, Sara. It's Ian. I'll start and then perhaps Chris or Joe can add. The top line performance has been muted, which creates pressure, but our McOpCo margins have held up well. We’re seeing lower inflation in areas like food and paper, down to low single-digit levels. Labor inflation, particularly in the US, is a headwind we're dealing with. Overall, we expect company-operated margins to be down a little from where we ended in 2023, but relatively strong given the context of the environment we're navigating.

Joe Erlinger, President of McDonald's USA

Our franchisees in the US are in a very strong financial position; they have the ability to invest. If you look at gross margin in the 20 years pre-COVID, we're actually at a high right now compared to those years. We feel good about the ability of our franchisees to invest via their P&L or otherwise. We're working through profitability discussions regarding the $5 meal deal. They have the ability to invest, and we are comfortable with the position in the US.

Chris Kempczinski, CEO

I just want to underline that we’re focused on sustainable strategies. There’s a lot of financial strength within our system to implement necessary changes; they have to be sustainable for us.

Mike Cieplak, Investor Relations Officer

Our next question is from Dennis Geiger with UBS.

Dennis Geiger, Analyst

Thank you, and thanks, Mike, for all your help, best of luck. I wanted to focus again on the meal deal. I appreciate all the insights there. Specifically, as it relates to customer awareness in the US of the meal deal and your marketing message or intensity, is that something you could help us frame up? Is it something that ramps, and when can we start to talk about the intention from a new value platform or a new larger value offer to guest count contribution?

Joe Erlinger, President of McDonald's USA

The power of our national voice is significant. As we exited 2023, we were comfortable with the local value, but we lacked a strong national voice. It took time to achieve that, and the $5 meal deal is an example. In Upstate New York, we saw trial and participation rates double after applying a national voice. Having a price point attached to messaging is important. We've previously run promotions like a buy one get one deal, but the trial rates for the $5 meal deal were 70% greater. Building awareness of any new national everyday value platform will be critical.

Chris Kempczinski, CEO

On the PACE question, that's ultimately on us. There's nothing externally driving PACE; it's all internal. In markets like France, where we have strong alignment, we can move quickly. Other places require more discussions due to the breadth of changes. Our capacity to move quickly is proven, and I hope in the US, we can have great discussions about the importance of adopting our value platform.

Mike Cieplak, Investor Relations Officer

Our next question is from Jeff Bernstein with Barclays.

Jeff Bernstein, Analyst

Great. Thank you very much. Just looking outside the US, I was hoping to touch on France and China. In France, I'm curious if you think it's more of a McDonald's-specific issue, which you may have referred to in the past versus a macro issue, and how you view the competition there. In China, if you mentioned that consumer sentiment is less confident, are you seeing anything that gives you pause on an otherwise aggressive unit growth outlook?

Chris Kempczinski, CEO

Sure. Thanks for the question, Jeff. Starting with France, indeed, we've seen a slowdown, and we are losing share, which indicates an opportunity for us to improve performance. The competition there is aggressive on pricing. We are enhancing our McSmart menu to stay competitive. Also, regarding families, we are reintroducing the EUR4 Happy Meal to address this consumer group. Lastly, we are working on marketing strategies to engage all customer segments, particularly since the Middle East impacts may be more pronounced here. As for China, it is a competitive environment right now. Consumer sentiment is weak, with a lot of promotional activity. We're seeing switching behavior among consumers based on the best deal. Positively, we are holding share, and our new unit openings are still yielding good returns. Therefore, we remain on track for our target of 1,000 new restaurants per year in 2024.

Joe Erlinger, President of McDonald's USA

I want to reinforce that the external trends and pressures are broad-based across IOM. Consumers are being more discerning, which creates challenges we do not expect to change in the immediate term. However, we're laser-focused on ensuring our value and affordability positioning wins in each of our key markets. The third quarter has started similarly to how the second quarter ended, with negative comp trends across IOM and each operating segment.

Mike Cieplak, Investor Relations Officer

Our next question is from Eric Gonzalez with KeyBanc.

Eric Gonzalez, Analyst

Hey, good morning, and thanks for the question. I'm curious about trade down. In the past, McDonald's was considered a defensive option as it would pull share from more expensive categories. So why do you think you might not be getting the trade down that you depended on previously? Is it a function of value perception or something that could be addressed in the new value construct?

Chris Kempczinski, CEO

Yes. Thanks, Eric. We are seeing trade down, but the loss of the low-income consumer exceeds the trade-down benefit. The low-income consumer is often abandoning the market altogether, choosing to eat at home and economize. We experience trade down, but it is simply not sufficient to offset the pressures on low-income consumers.

Mike Cieplak, Investor Relations Officer

Our next question is from Lauren Silberman with Deutsche Bank.

Lauren Silberman, Analyst

Thanks, guys. I wanted to follow up on comps in the back half of the year. With the quarter-to-date still running negative, should we expect that trend to continue through the third quarter? When can we start to talk about positive comps in the back half of the year?

Ian Borden, CFO

Hi, Lauren. It's Ian. The pressures are broad-based; we're seeing them across our major owned markets. We don't expect significant changes in the environment over the next few quarters. We're focused on honing value and affordability. If we get this right, we expect to draw consumers back. We believe compelling options will bring consumers back when they can.

Chris Kempczinski, CEO

McDonald's is at its essence a growth business. We will not accept negative comps as business as usual. We are committed to getting back to growth as foundational to value platforms, menu innovations, and robust marketing efforts to restore the business to its rightful place.

Mike Cieplak, Investor Relations Officer

Our next question is from Brian Bittner with Oppenheimer.

Brian Bittner, Analyst

Thanks, good morning. Chris, you said in your prepared remarks that your value leadership gap versus the competition has shrunk. I'm curious how you're measuring this gap and what informs you that it has shrunk. What gives you confidence you can reignite this gap with value at a time when everyone seems to be getting much more aggressive on value?

Chris Kempczinski, CEO

There are two ways we measure value; through consumer-based surveys. One measures brand impressions on value and affordability. The other captures recent experience on our most recent visit. These surveys indicate we lead on brand image, but pressure exists on the most recent visit experience. In terms of confidence about our ability to lead on value, it starts with 70 years of value leadership, allowing us to buy food and paper at lower prices. The way consumers define value includes intangibles like restaurant cleanliness, speed, and food quality, which we're focused on improving.

Ian Borden, CFO

I wouldn't underestimate the power of equity in our menu items. We have unmatched scale and level marketing dollars. We are equipped to ensure that these programs are strategically deployed effectively.

Mike Cieplak, Investor Relations Officer

Our next question is from Jake Bartlett with Truist.

Jake Bartlett, Analyst

Great, thanks for taking the question. I want to clarify your commentary about recent trends in the US. You mentioned the third quarter starting as the second quarter ended. If true, that would imply below what was reported for the second quarter. How does that match with the positive commentary on the $5 meal? I want to understand your points on recent trends and what's driving them.

Chris Kempczinski, CEO

That's right, Jake. We exited the second quarter with negative comps and have experienced negative comps in July. While the $5 meal deal shift positively connects with traffic, traditionally, traffic precedes sales. We're confident that our upcoming promotions will drive customer spend; our customers coming in for the $5 meal deal purchase more than just that meal. The average check exceeds $10.

Mike Cieplak, Investor Relations Officer

We have time for one more question with Jon Tower at Citi.

Jon Tower, Analyst

Thanks for taking the question. Can you help clarify your expectations for store margins for the balance of the year? It seems you've got good pricing through inflation, but with promotional activity ramping, what should we expect?

Ian Borden, CFO

Hi, Jon. It's Ian. I think, as you've seen through the first half, our restaurant margins have held up well despite muted top-line growth. We'll take less pricing through the year, but carryover pricing from 2023 will support us. Expect company-operated margins to be down a little compared to 2023 but strong considering the context of what we're navigating.

Mike Cieplak, Investor Relations Officer

That concludes our call. Thank you, Chris. Thank you, Ian. Thank you, Joe. Thanks, everyone for joining. Have a great day.

Operator, Operator

This concludes McDonald's Corporation Investor Call. You may now disconnect and have a great day.