McDonald’s outperformed by franchisee

MCDONALD’S shares reached an all-time high this week — but it is being outperformed by its biggest franchisee.

Buenos Aires-based Arcos Dorados Holdings, the largest operator of McDonald’s restaurants in the world, has seen its shares gain 90pc over the past year. In the same period the US company added 35pc.

The good times may keep rolling. Arcos Dorados, which operates 2,160 restaurants in Latin America, expects growth in Brazil and Argentina to continue rising and it’s stepping up investment in preparation, said Sergio Alonso, chief executive officer of Arcos Dorados.

The company is investing $500m through 2019 to open 180 new restaurants and update existing ones. About two-thirds of the cash will be spent in Brazil, the largest market of the 20 countries in which the company operates.

“Our growth dynamic continues,” Alonso said. “Both the economies of Argentina and Brazil have a better perspective. They’re growing in a very progressive way, so we’re focusing on retaining clients and gaining new ones.”

The company’s stellar performance over the past 12 months may be a reflection of several years of slumping shares, Bloomberg Intelligence analyst Michael Halen said.

Signs of a recovery in Brazil are helping. Economic activity in July expanded more than analysts expected, indicating the timid recovery that began in the second quarter continued into the third quarter. Argentina’s economy has also seen an incipient recovery, with the most recent figures showing it grew 3.3pc in May from a year earlier.

Arcos Dorados is funding its investment plan with free cash flow and is not planning to raise funds in debt markets, Alonso said, as it strives to maintain a debt to ebitda ratio under 2.5. It’s currently at 1.4.

The franchisee also operates in Venezuela, and is maintaining a long-term approach toward the country, he added.

The business there is self-sustaining, even though the menu has had to be adjusted based on supply availability. Arcos has no plans to exit the troubled nation.

“Our brand in Venezuela is as strong as it is in Brazil and Argentina, and we have a number of franchisees who continue to trust their investment decision,” he said. “We’re waiting and hoping the situation there will evolve positively.”