McDonald’s exits Russia but keeps its options open

Big Macs may be inflation-resistant, but recession-resistant is what’s needed to get through the next year. Like many others, McDonald’s (NYSE:MCD) has exited from Russia — selling its Russian restaurants to Alexander Govor, an existing franchisee.

• The new yet-to-be-named chain — which doesn’t have the right to use McDonald’s branding — offers a smaller menu with a new logo.
• Equipment and burgers are the same, but names are different — excluding certain items like Big Macs and McFlurrys.

McDonald’s will take a one-time hit of $1.2-1.4B in writing off its investment, but that doesn’t mean it’ll stay out of Russia forever. McDonald’s has negotiated the option to buy back its restaurants within 15 years.

Nuggets outperform: Down 33%, the S&P 500 Consumer Discretionary sector is the worst-performing sector in 2022. Spending on consumer discretionary (non-essential) goods is often the first to fall during a recession.

But McDonald’s — down 11% in 2022 — has managed to buck the trend. Since coming out of lockdowns, customers have prioritized experiences and dining out.

• The fast-food chain and its franchisees have been able to pass on higher costs through price increases.
• Per the latest CPI report, food-at-home prices have increased faster than food-away-from-home prices — an 11.9% increase vs. a 7.4% increase in the past year.

What’s your appetite in a recession? Consumers’ willingness and ability to spend will dictate how restaurant stocks perform in the coming months.

• Analyst Christopher Carril of RBC Capital Markets (Barron’s) says “the near term will likely remain bumpy for restaurant stocks.”
• At $MCD’s current valuation, there’s still more room to fall if we hit a recession.