We see the news that McDonald's will (MCD) offer free wi-fi in its US locations in January 2010 as a big deal and a clear, positive differentiator to its QSR peers such as Burger King (BKC), YUM, Wendys (WEN), Jack in the Box (JACK), Carls/Hardees (CKR) and and even Starbucks (SBUX). McDonald's is not a coffeehouse but has recently introduced premium brews and competes at least indirectly with SBUX for share of wallet.

Anyone who follows Panera (PNRA) closely and gets in their units knows the free internet coverage there is a huge draw. I find 50% plus of customers working on computers in Panera during non-peak hours. Panera is one of two chain restaurants that has grown customer traffic the last two quarters.

There’s been considerable discussion in the chain restaurant universe about rising consumer sentiment and possible upside to casual dining intent.

The NRA expectations and current situation index wiggled up (relative improvement) in November, and new research supporting improved casual dining sentiment will hit soon.

The Burger King (BKC) $1 double cheeseburger offer is underway, generating all of the high risk that we noted in our September 28 article.

The BKC National Franchise Association launched its second legal action of the year, asserting on November 10 that BKC can't set maximum prices. Its earlier 2009 action noted that soda marketing funds will be retained by BKC to pay for more marketing contrary to agreements.

McDonald's (MCD) had Investor Day in Chicago yesterday, and treated the analysts to breakfast AND lunch, and a pretty well developed presentation of US, Europe, APNEA, corporate and marketing actions underway. We monitored the discussion, and relate the following interesting points that might get lost otherwise:

• While they didn't want to get trapped into a number going forward, MCD had helped fund franchisees strategic leasehold improvement CAPEX--the McCafe expansion-- and might do so again for future initiatives. McDonald's owns a significant amount of the buildings and real estate, and credit is tight, even for McDonald's franchisees.

• Most every financial metric displayed--restaurant margin, franchising margin, ROIC and ROIIC--were up versus 2004 in every Division.

• The average US McDonald's franchisee unit had operational cash flow of $314K/unit last year (likely pre-debt service), and average equity of $4.7M per owner/operator. WOW !

• The MCD marketing machine is well developed,with national and local-co-ops all plugging away on multiple, supportive and complimentary brand and product themes, and a great R&D pipeline. One result is that McDonald's value menu mix percentage was only 10-11% (13-14% if you count the doublecheeseburger). Ergo, MCD doesn't run the same risk that Burger King (BKC) does by rolling the dice and putting its more limited TV behind a low end item,like the $.99 doublecheeseburger.

• MCD's early research estimated that of McCafe sales, 44% was incremental and 56% was tradeup. Either way, they win, if those numbers hold. That is one of the highest incremental gains seen in a long time.

• MCD's European average annual unit sales (AUVs) are great--$3.4M US average in Europe, $2.4M in the US and $1.8M in Asia/Pacific/Middle East/Africa. Russia was at $5.5M...wow ! No wonder the MCD company ownership ratio was highest in Russia (as it should be, because the ROI works). MCD does not refranchise to chase percentage margins--like some did (SONC)-- but does so on a disciplined basis.

• MCD's current media spending mix included 72% broadcast (down), and 12% digital (up). It is increasing its value oriented messaging next year.

MCD will be pressed to keep US same store sales positive--October was down .1%, and it's an emotionally sensitive metric. But these results overall show alot of size, scale and focus advantages.

Thus far in Q3 2009 earnings season, most of the chain restaurants have delivered “good” earnings results: generally negative sales comp results, favorable commodity and other cost reductions and as a result meeting EPS expectations.

Food commodity market conditions have been favorable, with price decreases tracking to weak demand. So long as the companies aren’t too far out in their contracting, and playing the generally favorable spot market conditions (one notable exception was Brinker (EAT) that noted on October 20^th that a chicken contact was above market and that they wouldn't see deflation until the back half of the year). Also, most have reported significant G&A cost reductions, including Darden (DRI), YUM and others, 100% of which flows to the bottom line.

The Burger King (BKC) $1 double cheeseburger campaign starts nationally on October 19. For Burger King, its high stakes. For the QSR sector, its a way to detect whether the $1 value focus will actually pay off.

In its August 25th earnings call, CEO John Chidsey indicated they were happy with the early $1 double results in about 40 markets. Earlier this year, Burger King and its franchisees failed twice to come to agreement to promote it, and these must be test markets or company markets.

Wednesday’s news about McDonald’s (MCD) sales softness made the restaurant universe move and pulled down other Quick Service Restaurant (QSR) operators (YUM, BKC).

But this should not have been new news. The QSR sector has been weakening for some time, as the table of selected “national/international” QSR and Casual Dining operators, 6 quarters of Same Store Sales (SSS) shows:

Last week we got the Q4 and full year earnings of Burger King (BKC) (see conference call transcript here) and on August 20^th the Q2 earnings of Popeyes (AFCE) (see conference call transcript here). Burger King reported disappointing sales comparables—US/Canada down 4.5%, while AFSC was one of the very rare chain restaurant universe gainers—up 4.3%.

We were intrigued as to why such a large sales performance difference.

Both the New York Times and the Wall Street Journal noted on August 21 that Starbucks (SBUX) was raising some prices. The effect was up to $.25 on larger, more complex drinks, $.05 on frappuccinos, $.15 on mochas, lattes and shots, and $.25 on macchiatos. But lattes or cappuccinos were decreased $.10, as were tall brewed coffees $.05, in some markets.

This was as noted in SBUX's April 30, 2009 second quarter earnings call, where CFO Alstead described it as neither a price increase not a price decrease, and the result of consumer research.

• The well written and designed RBC Operator and Investor Survey, by Restaurant Analyst Larry Miller, points to 50% of operators noting sales will not improve in August, versus 46% stable, versus 4% noting an absolute improvement expected. More downward pressure on the average check and mix shifts are expected, and fast fooders a bit more pessimistic.
• The National Restaurant Association’s Expectations Index (surveys 6 months out) is at 99.0, down 70 bpts. from May, and the second consecutive monthly decline. After falling dramatically for months, the index had wiggled up earlier this year.

On Monday, CNBC’s Jim Cramer featured Wendy’s (WEN) as a real turnaround - lots of upside potential, less worse at Arby’s (YUM), margins better, cheap for the current stock price. Cramer said the Wendy’s turnaround was real.

At the same time, yesterday, McDonald’s (MCD), one of the few companies still announcing monthly sales trends, announced a world-wide same store sales increase of 4.3%, 2.6% in the US.

We’ve recently listened carefully to McDonald's (MCD), Starbucks (SBUX), Chipotle (CMG), YUM, Dominos (DPZ) and Darden (DRI) earnings calls for news on sales/traffic/mix components. Brinker (EAT) and the upscale Morton’s (MRT) and Ruth Chris (RUTH) are forthcoming. Steak N Shake (SNS) and CKE reported Q3 sales via 8K filings. Not all companies disclose the same store sales components.

In looking at the table below, we see little evidence of turnaround traffic or stellar marketing results thus far, for the recently released quarter. Only Steak N Shake really moved the traffic needle via their anniversary $.15/$.79 burger promotions and other efforts. Fine dining comps are tracking considerably worse, at –15% or more. Industry traffic fell off the table in September 2008, so some easier comparables will be evident later this year.

In looking at CIT's last few earnings calls, its Feb 2009 investor presentation (theme: challenges, opportunity, making progress), and press coverage, what is unclear is the breakout and amount of the non-performing loans.

The 2009 CIT backup documents showed "retail" at only 7% of the portfolio.

With Ruby Tuesday's (RT) earnings due out Tuesday July 7th, tomorrow, a number of factors should make the outcome knowable or at least, guessable:

Analyst Projections seem too low: the analyst mid range for EPS for the year is $.45, but we roughly calculate $.42 already in so far, through Q3 (excluding closures/impairments). Shouldn't be too hard to meet $.03 in Quarter 4, right?

In looking at the June 29, 2009, Barron’s “puff-piece” article on Wendy/Arby’s Group (WEN) and its upward price movement Monday, I was reminded that one of the company's projected growth platforms, other than increasing number of US stores, improving margins at Wendy’s and improving R&D (Wendy’s breakfast was pulled until 2010) was international growth, via franchising and multi-brand development.

On the new US units growth front: good luck. Perhaps WEN has some acquisition in mind that would rocket the number of stores and markets up quickly. It’s still difficult and expensive to find the right sites in the US.

Restaurants, Franchisees and Discounting

In a June 23 New York Times Business article, Discounts Have Restaurants Eating Own Lunch, the woes of chain restaurants offering discounts—and the possible long term effect of doing so, was well outlined. The following passage caught my eye:

Year	2008	2007	Change
Restaurant AUV	$3231K	$3330K	-3.0%
EPS	$1.69 diluted	$1.82 diluted	-7.4%
Operating profit $	$45.2M	$52.6M	-14.1%
# weeks television	23	11	+109.1%
Average Quarter price/High Low	$43.58 to $7.49	$44.60 to $32.35

Disclosure: we have no stock positions in this or any other chain restaurant operator.

Burger King (BKC) stock values have taken quite a hit over the last day and half, down about a $4 share.

The company pre-announced its Q3 2009 earnings Wednesday, noting it missed its revenue forecast, with significant falloff of traffic in some zones, with Germany and Mexico hard hit, and a corresponding company margins hit. Earnings per share were still expected in the $0.33 zone [the company Board did approve a $200M buyback plan in March so that had to have an effect, too].