McDonald’s (MCD) is seeing a comeback, according to Evercore ISI analyst David Palmer.
“Relative market share trends have improved recently and we are increasingly bullish on McDonald’s U.S. business for 2025, with us seeing this trend continue through late 2024,” Palmer wrote in a client note, pointing to the successful launch of a limited-edition collector’s cup last week.
The product “not only boosted third-quarter sales, but also serves as evidence that the brand is strong and less burdened by low perceived value.”
The chain faces stiff competition as consumers push back against restaurant prices after years of price hikes. Looking ahead to 2025, McDonald’s will compete on value in a variety of ways, including increasing the pace of new menu items at the mid- and high-end price points, Palmer said.
Palmer raised his price target on McDonald’s to $320. McDonald’s shares closed at $287.55 on Monday.
McDonald’s U.S. same-store sales fell 0.7% in the second quarter due to declining customer traffic, the first time the company’s U.S. same-store sales have declined in 16 quarters. Positive growth in digital and delivery was a bright spot in an otherwise dark quarter.
The chain recently extended its $5 meal bundles through August and is working to build out a more permanent platform like its traditional $1, $2 and $3 menu items.
“Our value leadership gap has narrowed recently,” CEO Chris Kempczinski acknowledged during the company’s second-quarter earnings call.
The fast-food giant faces a variety of headwinds as consumers increasingly favor healthier options with premium dining experiences. Chipotle (CMG), with its $13 steak bowls, Wingstop (WING), with its $9 chicken sandwich combo, and even Shake Shack (SHAK), with its $11.99 Smoky Classic BBQ Burger, all reported positive sales growth this quarter.
Palmer said it could take another decade for McDonald’s traffic to return to early 2010 levels.
McDonald’s customer numbers began to decline in 2012 when the double cheeseburger was removed from the dollar menu, and by 2019, they had fallen by 12%. [that was] That was more than offset by a 22% increase in checks during that period.”
The gap between the number of customers and the amount of orders has “accelerated due to the COVID-19 pandemic,” with the amount of orders increasing by 50% but the number of customers decreasing by about 10%.
He said customers are “deserving of the reward” of paying more for food after the Golden Arches revamped its store designs, introduced a menu of premium sandwiches and launched a delivery service.
The story continues
Perceptions of value among lower-income households have declined over the past year, according to TD Cowen’s consumer tracking survey.
“In solving this value problem, they’re ignoring other parts of their strategy,” TD Cowen analyst Andrew Charles told Yahoo Finance, adding that they need to go back to what drove traffic in the past.
“We worry that McDonald’s strategy is too focused on value and not enough on what makes the brand special, like menu innovation and creative marketing campaigns,” Charles said.
Advertising value tiers and raising menu prices more thoughtfully could help McDonald’s regain that perception of value. The company could also benefit from faster service and a larger selection of chicken and drinks.
“Given the unprecedented traffic boost we saw in 2017 with the introduction of $1 drinks of any size, we strongly believe that everyday low-priced beverages can be a significant traffic driver,” Palmer wrote.
“We see significant growth opportunities in our chicken business,” Kempczinski told investors after the company’s second-quarter earnings report.
Kempczinski said chicken is “twice the size of the beef market globally and is growing faster,” adding that “thanks to long-standing menu items like McNuggets and McChicken Sandwiches, as well as newer products like McCrispy Sandwiches and McSpicy Sandwiches, chicken sales are now on par with beef sales.”
The drive-thru at a McDonald’s in San Ramon, California. (Smith Collection/Gad/Getty Images) (Smith Collection/Gad via Getty Images)
Palmer said McDonald’s is not Evercore’s “favorite stock,” but the fast-food company is buoyed by several key growth drivers.
These include boosting U.S. same-store sales with $5 meal sets, limited new menu items for the remainder of the year, and “new value messaging and menu news for 2025.”
This comes on top of a moderation in year-over-year comparisons in international markets in the fourth quarter.
“These same-store sales drivers, combined with an easing federal interest rate cycle, should support valuations as total revenue improves to double-digit levels in 2025,” he wrote.
StockStory aims to help retail investors beat the market.
Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter.Brooke DiPalma Or email me at bdipalma@yahoofinance.com
Find all the latest retail stock news and events here to better tailor your investment strategy.