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McD's strong sales expected to continue in 3Q

Analyst: Franchisees upbeat on sales but concerned about costs

Analysts are expecting McDonald's Corp. to continue its streak of increased earnings and sales when it reports third-quarter results Thursday.

They predict the Oak Brook, Ill.-based McDonald's will post robust sales for September, which will come on the heels of the company reaching a record-high share price last week and reporting increases in same-store sales for July and August.

While many McDonald’s franchisees also expect a boost in sales growth in the short term, they expressed concerns about lower check averages from initiatives like the Breakfast Dollar Menu and costs associated with the chain’s plan to remodel hundreds of restaurants, according to a report from Janney Capital Markets

Janney raised its projections for McDonald’s third-quarter earnings to $1.27 per share, which would mark a more than 10-percent jump from the company's earnings of $1.15 per share in the year-ago quarter. The firm also lifted its September same-store sales outlook for McDonald's to a 6.1-percent increase — well above a previous prediction of 2 percent — based on results from its McDonald’s Franchisee Survey.

According to a research note from Janney's restaurant analyst, Mark Kalinowski, the survey of 34 McDonald’s owner-operators, including 32 from the United States, yielded same-store sales expectations of 6.1 percent for September and 5.7 percent for October.

The franchisees surveyed gave several reasons for their optimism this fall, including the popularity of McDonald’s Monopoly Game promotion, sales of Real Fruit Smoothies, good weather, and the comparison of weaker sales trends from October 2009.

However, 22 of the 32 domestic franchisee respondents said they were concerned about flat to declining check averages. When those franchisees were asked if profits could rise with a flat or slightly declining average check, 17 responded yes, while 15 responded no.

The Janney report cited franchisee concern over the Breakfast Dollar Menu’s effect on check average, but other comments from respondents said the chain’s McCafe beverages were driving guest counts and profit margins enough to blunt that pressure. Other franchisees surveyed said lower food costs have helped this year, but they expressed concern that those costs would rise in 2011.

According to the report, some of the franchisees also were concerned about the costs they have been asked to incur to update their restaurants’ décor, as well as to adopt the equipment required for the McCafe beverage line and a new point-of-sale system.

When asked to rate their optimism for sales trends in the next six months, the franchisees rated their prospects somewhere between good and very good, averaging a 3.23 score on a 1-to-5-point scale, with 5 representing “excellent.” That value is greater than the average of 3.0 for the 43 previous franchisee surveys Janney has conducted, the report said.

McDonald's did not respond to requests for comment about the results of Janney's franchisee study, though a spokeswoman noted that the 34 franchisees surveyed "isn't representative of the more than 2,500 franchisees currently operating McDonald's restaurants in the U.S."

Another analyst, David Tarantino of R.W. Baird & Co. Equity Research, projected McDonald's to post third-quarter earnings of $1.24 per share, with global same-store sales rising 4.5 percent in September. His research note also laid out expectations of September same-store sales increases of more than 4.5 percent in the United States, 3 percent in Europe, and 5 percent in McDonald’s Asia/Pacific, Middle East and Africa division.

Also, Robert Derrington and Destin Tompkins of Morgan Keegan Equities Research said in a research note that, while their firm does not cover McDonald’s, they think the chain could benefit from positive trends expected in the quick-service segment.

“We believe fast-food segment sales are also likely to post a modestly improving trend in the coming months, aided by the slowly improving economy, easing comparisons and considerably less severe discounting versus last year,” they wrote, pointing to the proliferation of $1 menus during the recession.

“That very aggressive deal-pricing, combine with still tepid traffic trends, pushed the fast-food industry to its weakest same-store sales of the Great Recession. … Even the mighty McDonald’s domestic same-store sales averaged modestly negative results from early fall 2009 to late winter 2010," Derrington and Tompkins added.

The analysts noted, however, that the nation's unemployment rate must improve in order for the quick-service segment to sustain long-term same-store sales growth.

Contact Mark Brandau at [email protected]

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