McDonald's ( MCD ) comeback is underway, per Evercore ISI analyst David Palmer.
"We are increasingly bullish on McDonald’s US business for 2025 with some relative market share trend improvement occurring recently which we believe will continue through the second half of 2024," Palmer wrote in a note to clients, nodding to last week's success around the launch of limited-edition collector's cups .
The item "not only bolstered third quarter sales, but it is also evidence that the brand is strong and becoming less encumbered by a poor value perception."
The chain is facing fierce competition as consumers push back on restaurant pricing after years of hikes. Heading into 2025, McDonald's will compete for value in different ways, such as increasing the pace of new menu items in the medium and premium price tiers, Palmer said.
Palmer upped McDonald's price target to $320. On Friday, McDonald's stock closed at $278.49.
In the second quarter , McDonald's US same-store sales decreased 0.7%, driven by a drop in foot traffic. It's the first decline in US same-store sales in 16 quarters. Positive digital and delivery growth was a bright spot in a bleak quarter.
The chain recently extended its $5 meal deal through August while it works to create a permanent platform, such as its old $1 $2 $3 Dollar menu.
CEO Chris Kempczinski admitted in the company's Q2 earnings call that its "value leadership gap has recently shrunk."
The fast food giant is facing multiple headwinds as consumers increasingly prefer healthier options with an elevated dining experience. Chipotle ( CMG ), with its $13 steak bowl; Wingstop ( WING ), with its $9 chicken sandwich combo; and even Shake Shack ( SHAK ), with its $11.99 Smoky Classic BBQ Burger, all saw positive sales growth this earnings season.
Palmer said it will take the next decade for McDonald's to get foot traffic back to early 2010 levels.
McDonald's traffic began falling in 2012 with "the removal of the double cheeseburger from the Dollar Menu," he wrote, "with 12% traffic decline until 2019 but [that was] more than offset by 22% check growth during that time."
The discrepancy between foot traffic and check size "accelerated during COVID," with a 50% uptick in check size and another roughly 10% decline in traffic.
He said that customers paying up for higher priced food "was well-earned," as the Golden Arches updated its store designs, introduced premium sandwich offerings, and launched a delivery service.
Based on TD Cowen's consumer tracker, the value perception among low-income audiences has declined in the past year.
"In order to fix this value problem, they're ignoring the other parts of the playbook," TD Cowen analyst Andrew Charles told Yahoo Finance, adding that there's a need to return to historical traffic drivers.
"I'm worried that McDonald's playbook is just going too deep on value and not enough on what makes the brand so special, around menu innovation and creative marketing campaigns," Charles said.
Advertised value tiers and more careful menu price increases can help McDonald's regain its value perception. Speedier service and more chicken and drink offerings could also benefit the company.
"We are big believers that everyday low priced beverages can be a key traffic driver as we saw the introduction of $1 any size beverages drive a rare year of traffic growth in 2017," Palmer wrote.
Following its Q2 earnings results, CEO Kempczinski told investors he sees "a significant opportunity for growth in chicken."
Kempczinski added that it's "a category that's twice the size of beef globally and growing at a faster rate" and that "chicken sales are now on par with beef sales" thanks to longtime menu items like McNuggets and the McChicken sandwich as well as new items like the McCrispy and McSpicy sandwiches.
Palmer said that while McDonald's is not Evercore's "favorite stock," the fast food company is firing away with some key growth drivers.
These include an improvement in US same-store sales with the $5 meal deal bundle, limited new menu items for the rest of the year, and "new value messaging and menu news in 2025."
That's in addition to an easing in year-over-year comparisons for international markets in the fourth quarter.
"These same-store sales drivers, together with an easing fed rate cycle, should be supportive of valuation as total return improves to double-digit levels in 2025," he wrote.
BrookeDiPalma