Key takeaways
- McDonald’s is making remote layoff announcements to corporate employees after shutting its offices temporarily, having announced the job cuts earlier this year
- The fast food mega-chain’s stock was up 0.9% at the news and is overall up nearly 7% this year
- McDonald’s is considered a ‘safe’ stock, but it faces some hurdles in the near future
Fast food titan McDonald’s is laying off corporate employees this week as it concludes the review process, having temporarily shut the offices so it can do the deed remotely. The layoffs were announced earlier this year in another blow to white-collar workers, who are bearing the brunt of job cuts thus far.
The experts aren’t worried about this particular move, and Wall Street seems happy enough with McDonald’s new business strategy. But there are some potential storms on the horizon for McDonald’s that may cause a dip in profits.
As the layoffs trend now spreads out to more established industries, these pressures could even threaten McDonald’s status as a ‘recession-proof’ stock. Let’s get into the details.
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What’s the latest from McDonald’s?
McDonald’s has temporarily closed its U.S. offices this week as it plans to announce internal layoffs remotely to affected employees. It’s currently unknown how many roles will be affected.
The fast food titan first announced the layoffs in January. At the time it said its new business strategy involved reviewing corporate employee levels and building more restaurants, so that meant layoffs in some departments and expansion in others.
McDonald’s CEO Chris Kempczinski, who has been in the role since 2019, said in an internal letter “We will look to our strategy and our values to guide how we reach those decisions and support every impacted member of the company.”
What was the market reaction?
Because of McDonald’s position as a ‘safe’ stock and its reasonable explanation for layoffs, Wall Street has viewed the layoffs decision as a favorable one. The stock price was up 0.9% by closing on Tuesday and has gained 6.79% since the start of the year.
The company’s last earnings call at the end of January revealed a number of insights into how the fast-food chain was adapting to the shifting economic climate.
It beat Wall Street’s earnings per share and revenue forecasts, hitting $5.93 billion total revenue against an anticipated $5.68 billion, with domestic and international markets both driving strong sales. It also plans on opening 1900 new restaurants across the world and has earmarked over $1 billion for developing the 400 of these operating in the U.S. and international markets.
However, Kempczinski continued to take a cautious tone with the macroeconomic environment, saying he expects “short-term inflationary pressures to continue in 2023.” He’s previously stated McDonald’s was predicting a “mild to moderate” U.S. recession. McDonald’s share price dropped 1% at his latest word of caution.
Could we see a ‘white-collar recession’?
The term was coined in recent months as companies began to shed their corporate office workers rather than the employees on the ground. McDonald’s certainly isn’t the first ‘safe’ stock to do so – others have done the same with varying Wall Street reactions.
General Motorsnnounced last month it plans to cut around 500 office jobs in the company, but that it was about performance rather than cutting costs. GM stock was up 0.6% at the news and is up 5.68% since the start of the year.
Earlier this year Boeing announced it was cutting 2,000 jobs across its finance and HR departments, with some of the roles being outsourced to an Indian firm. In a statement the aerospace giant said “we expect lower staffing within some corporate support functions so that we can focus our resources in engineering and manufacturing.” Boeing share prices bumped up by 1%.
FedEx has also made cuts, laying off 10% of its executives in an attempt to streamline operations. CEO Raj Subramaniam said it was a “necessary action to become a more efficient, agile organization.” The company expanded rapidly during the pandemic, but its operating profit margin was lagging behind competitors like UPS. FedEx stock was up 2.7% at the announcement.
All of these are large, established companies that have had their reasons for slimming down corporate instead of the workers on the ground. But what’s concerning is that the economic downturn has moved past the tech market into more established industries – and it’s hitting the higher-paid salaried employees first.
Can McDonald’s stay “recession-proof?”
McDonald’s is considered a safer stock to have in your investment wheelhouse during a recession because it sells a low-cost, simple pleasure: fast food. It’s also performed consistently well over the last 20 years and returned over 2000% against the S&P 500’s 386% in that same timeframe.
Even a mega-chain like McDonald’s isn’t immune to inflationary pressures. It’s raised prices amid persistently high inflation and may need to do so again should it continue. This could take a chunk out of the chain’s profits in 2023.
Labor shortages in the restaurant industry have led to escalating pay competitions between chains, including McDonald’s, to attract new workers. While this plugs the labor gap, increased wages take a chunk out of profit margins.
Finally, consumer spending is weakening as the Fed continues to raise interest rates. The latest data showed only a 0.2% increase in consumer spending in February, down from January’s surprise surge. McDonald’s is designed to be low-cost, but it could push more people away from what they consider ‘nice to haves’.
But McDonald’s still has a solid business model and the ear of investors, making it an attractive stock despite the macroeconomic influences.
The bottom line
It’s likely the most McDonald’s will see is a downgrade to ‘recession-resistant’ rather than ‘recession-proof’, but the company’s growth plans and sensible business restructuring are all pointing in the right direction.
With job cuts now affecting more established industries, investors will be casting a close eye over upcoming Q1 2023 results to see if there are any warning signs. It’s well worth doing the same for your own portfolio to make sure you’re insulated against any volatility.
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