Burger King Worldwide Earnings Preview: Sales And Margins To See Incremental Growth

Burger King Worldwide (NYSE:BKW) is scheduled to release its Q1 2014 earnings on April 25. The company had a good year in 2013, recording a 0.5% rise in same-store sales. Comparable sales or same-store sales, is an important measure to gauge a restaurant’s performance since it only includes restaurants operating for more than a year and excludes the effect of currency fluctuation. Last quarter, the same-store sales increased by 1.7%. Keeping in mind Burger King’s expansion plans, store re-imaging efforts and menu optimization, we expect increasing sales and widening margins in Q1 2014.

We have a price estimate of $28.97 for Burger King, which is about 13% above the current market price.

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Sales To See Incremental Growth

The company observed a negative impact on sales in Q4 2013 due to the extreme winter weather and expects the effect to continue in Q1 2014. Moreover, it faces tough competition from fast food chains such as McDonald’s and fast casual chains such as Chipotle Mexican Grill and Panera Bread. However, Burger King is trying to differentiate through re-imaging its outlets and optimizing its menu offerings. By Q4 2013, 30% of Burger King outlets in the U.S. had been remodeled on the modern “20/20” image. These remodeled outlets had recorded an average sales uplift of 15-20%. The company plans on remodeling 40% of its stores in the U.S. by 2015. This could contribute to lifting the sales in the U.S. outlets in the first quarter this year.

Last quarter, the company had also successfully introduced new offerings in the menu, namely the Big King Sandwich and BBQ Rib Sandwich. These new items offer wider options in the larger burger segment and are expected to attract more customers to some extent.

Franchise Royalties To Rise As Expansion Continues

Burger King completed its global re-franchising initiative in Q4 2013, handing over all but 52 of its stores to franchisees. The franchising model proves profitable to the company as it doesn’t require it to incur operating costs. According to our valuation, Franchise Royalty contributes 74% to the company’s share price. Burger Kings’ expansion plans are expected to boost the franchise royalty stream of revenue for the company, which will lead to wider margins.

The company added 670 new restaurants in 2013, bringing the its total store count to 13,500. Joint ventures initiated by the company in China, Brazil and Russia have grown significantly adding 100 more outlets in these markets last year. In 2014,the company plans to further expand internationally and also to enter France and India.