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After pandemic lockdowns in 2020 that shuttered many restaurants, followed by price increases throughout 2022 and 2023, Oppenheimer analysts on Friday said 2024 would be a year of “normalization” for the industry, with easing costs and lower prices on menus.
However, they said, the cost of dining out will likely stay above historical levels.
“Menu pricing across the industry is likely to be below 2022/2023, but early company commentary suggests 2024 could remain above the historical ~2% level,” the analysts said.
Against that backdrop, the analysts downgraded shares of McDonald’s Corp. and Papa John’s International Inc. to their equivalent of a hold rating — but they also upgraded Yum Brands Inc. to their version of a buy.
Shares of McDonald’s
MCD,
finished 0.9% lower on Friday. Papa John’s
PZZA,
fell 4% and Yum Brands
YUM,
lost 0.3%.
For McDonald’s, the analysts said they didn’t see anything to drive the stock higher this year after a rebound that began in October and a year in which price increases lifted sales. They said the burger chain’s appeal among lower-income consumers or those seeking cheaper options appeared to be “stuck in neutral,” and that there were still questions about customer foot traffic despite stronger digital demand, efforts to make higher-quality hamburgers and new stores abroad.
Meanwhile, Papa John’s per-share profit estimates this year appeared “aggressive,” the analysts said, citing tougher financial comparisons with the prior year.
For Yum Brands — which runs KFC, Pizza Hut and Taco Bell — the analysts said that “subdued investor sentiment” around concerns over trends at Taco Bell and Pizza Hut represented an opportunity for investors. Taco Bell, they noted, faced tougher fourth-quarter comparisons with the prior year, thanks to the popularity of its Mexican pizza last year. But they said new approaches to the Taco Bell format — like cantina restaurants — along with digital sales and Taco Bell’s loyalty program would also help it through the year. And they said that outside of China, KFC was still going strong overall.
The analysts made that assessment as consumers are trying to navigate a higher-priced world, a result in large part of pandemic-related supply disruptions, Russia’s war in Ukraine and companies’ efforts to keep prices elevated. The cost of dining out rose through much of last year — at a faster clip than groceries — as restaurants processed higher food costs, higher wages for employees and postpandemic customer demand.
But the analysts said that for the restaurant industry, those disruptions appeared to be in the rearview mirror, at least to some degree.
“For the first time since 2020, our work indicates 2024 will experience patterns across demand, pricing, cost inflation and margins that more closely resemble pre-COVID trends,” they said.
They said that within restaurants, food costs would be more manageable — outside of beef, which they said was the main driver of rising food costs. Prices for other items, they said, held flat or were dropping.
