Noting the ongoing chicken sandwich war, McDonald’s Corp. says it’s focused on new product in this category, but JPMorgan analysts say the fast-food giant will have a hard time competing with Popeyes and Chick-fil-A for operational reasons.
Despite largely sitting out the chicken sandwich competition, McDonald’s reported an earnings and revenue beat for the fourth quarter on Wednesday.
On the earnings conference call, Chief Executive Chris Kempczinksi said the company MCD, -1.12% has “a very detailed and intimate understanding of what our competitors are doing.”
On Tuesday, McDonald’s announced the addition of two limited-time chicken sandwiches to the breakfast menu using its existing McChicken patty.
Read: Starbucks says coronavirus outbreak likely to hit profit this year
“Our menu, as you know, is much more broad than some of our competitors, so that’s something that we need to be mindful of in terms of what we might do in chicken, what knock-on effect that might have on the rest of the menu from the speed of service,” Kempczinksi said, according to a FactSet transcript of the Wednesday earnings call.
Based on the company commentary, JPMorgan analysts think McDonald’s is limited in the type of product it can use to compete in the ongoing chicken sandwich war, and that will hurt the fast-food giant.
“To us, this means a fast-executed-from-frozen product that will not be able to fully meet the fresh product started with at Popeyes or Chick-fil-A,” analysts wrote in a note.
Popeyes is part of the Restaurant Brands International Inc. QSR, -1.68% portfolio and Chick-fil-A is privately-held.
JPMorgan rates McDonald’s overweight with a $215 price target.
McDonald’s is also facing a breakfast battle with Wendy’s Co. WEN, -0.71% , which is investing $20 million to launch a morning menu.
“Domestically, McDonald’s continues to struggle at breakfast, which could get more complicated with the national breakfast launch at Wendy’s in coming weeks, though management indicated this would be of utmost focus for the coming year,” said BTIG analysts led by Peter Saleh in a note.
McDonald’s Chief Financial Officer Kevin Ozan said on the call that getting guest count back to growth in the U.S. is a “top priority.”
“In particular, the U.S. is centered on stemming traffic losses at the breakfast daypart by focusing on running better operations, introducing new menu items, and offering delicious food at a compelling price point,” he said.
Dow Jones Market Data Group BTIG notes that all of the segments of the day had declines, but at breakfast, McDonald’s may also be facing off with another chain.
“While we hesitate to believe that McDonald’s and Starbucks have significant customer overlap, we believe that on the margin, Starbucks’ recent gains have had some impact,” analysts said.
Starbucks SBUX, -1.14% reported fiscal first-quarter results on Tuesday.
See: Starbucks would’ve raised its guidance if not for the coronavirus
BTIG rates McDonald’s stock buy with a $240 price target.
SunTrust Robinson Humphrey also raises the specter of promotional risk. Analysts led by Jake Bartlett think franchisees, who have record cash flows, could focus on value to take on other fast-food chains.
“[W]e still expect a balanced promotional environment, but our concern is rising,” SunTrust said.
Should value come into play, SunTrust said Wendy’s, Jack in the Box Inc. JACK, -0.88% and Carrolls Restaurant Group Inc. TAST, -3.61% , the largest Burger King franchisee, would be exposed.
Burger King, like Popeyes, is part of the Restaurant Brands International portfolio.
SunTrust rates McDonald’s stock buy with a $250 price target.
McDonald’s stock has gained 19.5% over the past year while the Dow Jones Industrial Average DJIA, -2.06% is up 13% for the period.
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