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 priced tiers, Palmer said.

Palmer upped McDonald's price target to $320. On Friday, its shares 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 like its old $1 $2 $3 Dollar menu.

CEO Chris Kempczinski admitted the company's "value leadership gap has recently shrunk" in its Q2 earnings call.

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 and another roughy 10% decline in traffic.

He said customers paying up for higher priced food "was well-earned" as the Golden Arches went through store design updates, introduced premium sandwich offerings and launched its 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 that there's a need to return to historic 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 gain back its value perception. Speedier service and more chicken and drinks 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 Chris Kempczinski told investors he said "a significant opportunity for growth in chicken."

Kempczinski added, it's "a category that's twice the size of beef globally and growing at a faster rate" with "chicken sales are now on par with beef sales" thanks to long-time menu items McNuggets and McChicken, plus new items like the McCrispy and McSpicy sandwich.

Palmer said though McDonald's is not Evercore's "favorite stock," the company already is firing away with some key growth drivers.

They include improving US same-store sales with the $5 meal deal bundle, limited new menu items for the rest of year, and "new value messaging and menu news in 2025."

That's in addition to an ease 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.

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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