McDonald’s (MCD) is on the path to a strong comeback, according to Evercore ISI analyst David Palmer.
In a note to clients, Palmer expressed increasing confidence in McDonald’s U.S. business outlook for 2025. He highlighted recent improvements in market share trends, which he expects to continue through the latter half of 2024. This optimism follows the successful launch of limited-edition collector’s cups last week, which not only boosted third-quarter sales but also underscored the brand’s strengthening position and fading concerns about its value perception.
However, McDonald’s faces stiff competition as customers push back against rising restaurant prices after years of increases.
As 2025 approaches, McDonald’s plans to focus on value through various strategies, including introducing new menu items in the medium and premium price ranges, Palmer noted.
Palmer raised McDonald’s price target to $320. As of Friday, the company’s stock closed at $278.49. Despite a decline in U.S. same-store sales by 0.7% in the second quarter, driven by a drop in foot traffic—the first decline in 16 quarters—digital and delivery growth provided a silver lining in an otherwise challenging quarter.
Recently, McDonald’s extended its $5 meal deal through August as it works on creating a permanent value platform, similar to its former $1 $2 $3 Dollar Menu. During the company’s Q2 earnings call, CEO Chris Kempczinski acknowledged that McDonald’s “value leadership gap has recently shrunk.”
The fast-food giant is also grappling with changing consumer preferences, as more people opt for healthier options and higher-quality dining experiences. Competitors like Chipotle (CMG), with its $13 steak bowl; Wingstop (WING), offering a $9 chicken sandwich combo; and Shake Shack (SHAK), featuring an $11.99 Smoky Classic BBQ Burger, all reported positive sales growth this earnings season.
Palmer believes it could take up to a decade for McDonald’s to restore foot traffic levels to those seen in the early 2010s. He noted that McDonald’s traffic began declining in 2012 following the removal of the double cheeseburger from the Dollar Menu, leading to a 12% traffic drop by 2019, though this was offset by a 22% increase in average check size during that period.
The gap between foot traffic and check size widened further during the COVID-19 pandemic, with check sizes increasing by 50% while traffic saw an additional 10% decline. Palmer noted that customers were willing to pay more for higher-priced menu items, as McDonald’s revamped its store designs, introduced premium sandwiches, and launched a delivery service.
Despite these efforts, TD Cowen’s consumer tracker shows that the value perception among low-income consumers has declined over the past year. TD Cowen analyst Andrew Charles expressed concern that McDonald’s is focusing too heavily on value and neglecting other key aspects of its strategy, such as menu innovation and creative marketing. He emphasized the need for the company to revisit its historical traffic drivers.
While McDonald’s may not be Evercore’s top stock pick, Palmer acknowledged that the company is making progress with several key growth initiatives. These include an improvement in U.S. same-store sales through the $5 meal deal bundle, limited new menu items for the rest of the year, and fresh value messaging and menu updates planned for 2025.
Additionally, Palmer pointed out that year-over-year comparisons for international markets should become easier in the fourth quarter. He concluded that these drivers, along with an anticipated easing of the Federal Reserve’s rate hikes, could support McDonald’s valuation, leading to double-digit total returns by 2025.