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Analyst: McD franchisees upbeat on sales

Based on a survey of McDonald’s franchisees in the United States, the chain of nearly 14,000 domestic quick-service restaurants could be poised for its best sales month in years, securities analyst Mark Kalinowski of Janney Capital Markets wrote in advance of the company’s second-quarter earnings report Friday.

The investment firm’s McDonald’s Franchisee Survey revealed that robust sales from June and expected for July have the sample of owner-operators feeling more optimistic about their six-month outlook than they had reported in previous surveys.

Upon interviewing 28 franchisees controlling 166 McDonald’s units in the United States, Janney Capital Markets is raising its forecast of June same-store sales at the brand to 7.3 percent, up from a prior projection of 2.6 percent, Kalinowski wrote.

The figure represents McDonald’s best result since a 7.4-percent same-store sales increase in August 2007. Franchisees surveyed also gave a collective estimate of 6.2-percent same-store sales growth for July.

“Our ‘buy’ rating [for McDonald’s stock] is driven by impressive same-store sales trends in the U.S., which we believe are attributable to best-in-class store-level execution,” Kalinowski wrote. “We believe that McDonald’s will continue to grab additional market share in all three major geographies, helping the stock gradually over time.”

Janney also raised its same-store sales estimates for June to 4 percent in McDonald’s Europe division and to 2.5 percent in its Asia/Pacific, Middle East, Africa, or APMEA, division.

Kalinowski’s 7.3-percent projection for June same-store sales, when combined with increases of 4 percent in April and 2.4 percent in May, results in an estimate of a second-quarter comparable-sales gain of 4.6 percent in the United States. By comparison, analyst Jason West of Deutsche Bank wrote in a recent research note that his bank modeled June same-store sales as up only 3 percent in the United States.

The owner-operators surveyed gave several, sometimes contradictory, reasons for McDonald’s success in June and July. But some of the more common responses reported in Janney’s survey included increased menu prices, slight upticks in employment in their regions, lapping good increases from a year earlier, and a calendar shift in July that will result in five full weekends.

The chain’s most recent menu moves include additions to its popular frozen-beverage lineup. McDonald’s rolled out the Mango Pineapple Real Fruit Smoothie in late June and the Frozen Strawberry Lemonade in early May, as well as a test of Rolo McFlurries. The brand will have to contend with the July 2010 launch of Real Fruit Smoothies, making for a tough comparison in July same-store sales.

The franchisees rated their average outlook for the next six months as 3.41 on a five-point scale, between “good” and “very good,” compared with a 3.0 average result over the history of the survey, Kalinowski wrote. Three months ago, the McDonald’s Franchisee Survey had an average outlook of 3.11. The current survey’s score is close to the all-time high of 3.46, reported in February 2004.

“It is possible that, following the ‘boom times’ of domestic comp growth over spring 2003 to fall 2007, franchisees’ expectations are coming down to levels that might reflect more sustainable comp numbers over the long haul,” Kalinowski wrote. “That said, with the economy perhaps on the mend to some degree, franchisees today seem more optimistic about the six-month outlook for their business than they did back in late 2009 and early 2010 [when the score was 2.12].”

The franchisees reported an average rating of 1.94 for their views of their relationship with franchisor McDonald’s Corp. This score fell below both the 2.13 result from three months ago, and this metric typically ranges between 2.1 and 2.2, Kalinowski wrote.

Comments contained within Kalinowski’s report show a general feeling that the franchisor is exerting more control than before in terms of managing stores’ labor costs, launching new menu items that put pressure on margins and service times despite selling well, and calling for remodels or new equipment that prove to be expensive.

Kalinowski noted that comments might not be representative of the whole McDonald’s franchise community in the United States, which has more than 2,500 owner-operators.

Oak Brook, Ill.-based McDonald’s operates or franchises nearly 33,000 restaurants worldwide, and the company will report second-quarter earnings before markets open on Friday.

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN

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