According to David Palmer, analyst at Evercore ISI, McDonald’s (MCD) comeback is underway.
“We are increasingly optimistic about McDonald’s U.S. business in 2025, given some recent improvement in relative market share trends that we believe will continue into the second half of 2024,” Palmer wrote in a note to customers, citing last week’s success surrounding the launch of limited-edition collector cups.
This new addition “not only increased sales in the third quarter, but is also proof that the brand is strong and is suffering less and less from a poor perception of value.”
The chain faces stiff competition as consumers put renewed pressure on prices after years of restaurant price increases. By 2025, McDonald’s will compete on price in other ways, such as introducing new menu items in the mid- and high-end price ranges with increasing frequency, Palmer said.
Palmer raised the price target for McDonald’s to $320. The stock closed at $278.49 on Friday.
In the second quarter, McDonald’s U.S. revenue fell 0.7%, driven by a decline in customer traffic. This is the first decline in U.S. revenue in 16 quarters. Positive growth in digital and delivery was a bright spot in a gloomy quarter.
The chain recently extended its $5 menu offer through August while it works to create a permanent platform like its old $1, $2 and $3 menu.
CEO Chris Kempczinski admitted in his second-quarter conference call that the company’s “value leadership gap has narrowed recently.”
The fast-food giant is battling numerous headwinds as consumers increasingly prefer healthier options with an upscale 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 customer traffic back to early 2010 levels.
McDonald’s customer traffic began to decline in 2012 when “the double cheeseburger was removed from the dollar menu,” he wrote, “with a 12% decline through 2019, but more than offset by 22% growth in checks during that time.”
The discrepancy between customer traffic and check size “accelerated during COVID,” with check numbers up 50% and customer traffic down another about 10%.
He said the price customers paid for the higher prices of their groceries was “well deserved” after Golden Arches updated its store design, introduced premium sandwich offerings and launched a delivery service.
According to TD Cowen’s consumer tracker, value perception among low-income audiences has declined over the past year.
“To fix this value problem, they’re ignoring the other parts of the playbook,” TD Cowen analyst Andrew Charles told Yahoo Finance, adding that a return to historical traffic drivers is necessary.
“I worry that McDonald’s strategic plans focus too much on value and not enough on what makes the brand special, like menu innovation and creative marketing campaigns,” Charles said.
Promoting value-level offers and more cautious price increases on the menu can help McDonald’s regain its value perception. Faster service and a wider selection of chicken and beverages could also benefit the company.
“We firmly believe that affordable everyday beverages can be a key traffic driver, as we experienced a rare year of traffic growth in 2017 with the launch of $1 beverages of any size,” Palmer wrote.
After announcing second-quarter results, CEO Chris Kempczinski told investors there was “a significant growth opportunity in the chicken business.”
Kempczinski added that it is “a category that is twice the size of beef globally and growing faster,” with “chicken sales now on par with beef sales” thanks to long-standing menu staples McNuggets and McChicken, as well as new products like the McCrispy and McSpicy sandwich.
Palmer said that while McDonald’s is not Evercore’s “favorite stock,” the company already has some important growth drivers.
These include improving sales in U.S. stores through the $5 menu package, a limited number of new menu items for the remainder of the year, and “new value messages and menu innovations in 2025.”
In addition, there was an easing in the international markets in the fourth quarter compared to the previous year.
“These revenue drivers in existing stores, along with an easing Fed rate cycle, should support valuation as total returns improve to double digits by 2025,” he wrote.
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Brooke DiPalma is a senior reporter at Yahoo Finance. Follow her on Twitter at @Subscribe or email her at [email protected].
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