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McDonald’s sees results from price hike

Chain tells analyst that check averages improve after 1% price increase

McDonald’s latest pricing strategy, which included a 1-percent increase in March, has paid off by pulling the quick-service chain’s average check out of negative territory, according to a securities analyst.

Company officials disclosed to analyst Andy Barish of Jefferies & Company that McDonald’s average check in March was flat compared with a year ago at its more than 14,000 U.S. restaurants. Barish estimated that McDonald’s 3.8-percent increase in same-store sales last year included a 1-percent decline in check average.

The improvement in check average, combined with a new-product pipeline poised to capitalize on favorable chicken prices and the beginnings of recovery in earthquake-ravaged Japan, has Jefferies maintaining a “hold” rating on McDonald’s Corp. stock with a price target of $80 per share. McDonald’s stock closed at $78.64 on Monday, up 0.42 percent. Barish disclosed that Jefferies trades in McDonald’s stock.

Barish recently met with Pete Bensen, McDonald’s chief financial officer, and Dave Garland, CFO of the company’s Asia/Pacific, Middle East, Africa division at McDonald’s headquarters in Oak Brook, Ill.

“We came away with increased confidence in the U.S. and APMEA businesses, as domestic same-store sales start to benefit from a flattening check average and Japan starts to recover,” Barish wrote in a research note. “Near term, we see opportunities for margin-positive chicken line extensions, while bigger new-product news likely [would come] in 2012 and 2013.”

Barish said McDonald’s would deploy a steady stream of new products this year, but not to expect any “blockbusters” in 2011 to match the punch of recent rollouts for Angus Third Pounders or Real Fruit Smoothies.

“We would expect a lot more chicken news — some planned and some opportunistic given commodity favorability of that protein — including current McChicken sandwiches and a relaunch later in the year of the premium chicken sandwich lineup,” Barish said. “Frozen Strawberry Lemonade should be in the local McDonald’s any day now.”

McDonald’s USA spokeswoman Danya Proud confirmed that the Frozen Strawberry Lemonade is already in the majority of the chain’s domestic restaurants and said national advertising for the new drink would begin May 9. In Chicago, prices for the beverage were $1.59 for a small, $1.89 for a medium and $2.19 for a large.

Recent reports and press events for McDonald’s show an active R&D pipeline that includes an Asian Salad expected to roll out later in May and a Mango-Pineapple Real Fruit Smoothie slated for a July introduction. The chain also reportedly tested Jalapeno Cheddar McChicken and Cheddar Onion McChicken sandwiches in Orange County, Calif., last month.

McDonald’s tested several chicken products last year, including the Garden Fresh Wrap in Orlando, Fla.; Chicken Flatbreads in Baltimore, Albuquerque, N.M., and Omaha, Neb.; and the Chicken Grande Wrap in Chicago.

Barish said in his report Monday that McDonald’s sales are starting to do well in key Asian markets, despite this year’s floods in Australia and the March 11 earthquake and tsunami in Japan.

“It sounds like Japan same-store sales are recovering in April after March’s earthquake and tsunami tragedy,” Barish wrote. “Australia is still chugging along, and China’s unit growth and same-store sales are moving in the right direction.”

McDonald’s China said last week it would hire 50,000 people this year in light of a 6.5-percent same-store sales increase in the first quarter and plans to open 200 locations there this year.

McDonald’s operates or franchises more than 32,000 restaurants in 117 countries.

Contact Mark Brandau at [email protected].

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