A McDonald's in Buenos Aires, Argentina. - Dan DeLuca / <a href='https://www.flickr.com/photos/dandeluca/7032457727'>Flickr</a> A McDonald's in Buenos Aires, Argentina. - Dan DeLuca / <a href='https://www.flickr.com/photos/dandeluca/7032457727'>Flickr</a>

McDonald’s Is Being Outperformed by Its Largest Franchisee

McDonald’s reached an all-time high this week, but its biggest franchisee has been doing even better.

Buenos Aires-based Arcos Dorados Holdings Inc., the largest operator of McDonald’s restaurants in the world, has seen its shares gain 90 percent over the past year while the U.S. company added 35 percent.

The good times may keep rolling. Arcos Dorados, which currently 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 $500 million 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 in an interview. “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 in a phone interview.

“It’s following a period of massive underperformance,” he said. The company’s American depositary receipts slumped 80 percent from mid-2014 until early last year, and have since more than quadrupled.

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 3.3 percent 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 unruly 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.”


©2017 Bloomberg L.P.

This article was written by Carolina Millan and Fabiola Moura from Bloomberg and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to [email protected].

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