Burger King’s Earning Preview: Entry Into Lucrative Markets & Tim-Hortons Deal To Boost Top-line Growth

BKW: Burger King Worldwide logo
BKW
Burger King Worldwide

Burger King Worldwide (NYSE:BKW) is scheduled to release its third fiscal quarter earnings in the first week of November. The company has been consistent in delivering excellent financial results, despite increasing competitive activity in the restaurant industry, especially in the breakfast segment. On the other hand, the industry is facing commodity price inflation and decreasing customer traffic. Burger King’s 100% franchised model has been successful in widening its margins over the last couple of years. Another highlight for Burger King is the company’s merger with the Canadian multinational fast-casual restaurant chain, Tim Hortons (NYSE: THI).

In the second quarter, Burger King managed to deliver yet another positive comparable store sales, as the global comparable sales for the second quarter were nearly 1%, driven by strong sales in all four regions. The reported net income increased by almost 19.4% to $75.1 million from the last year’s figure of $62.9 million. The total reported revenues declined yet again by nearly 6% to reach $261.2 million due to a decrease in company-operated restaurant revenues by 65%, primarily driven by the net re-franchising of 360 company-owned restaurants during 2013. [1]

We have a price estimate of $28 for Burger King, which is about 12% below the current market price.

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See full analysis for Burger King

Merger With Tim Hortons To Provide Growth Opportunities

In the last week of August, Tim Hortons and Burger King Worldwide entered into an agreement under which the two recognized companies joined hands to create the World’s third largest quick service restaurant company. [2] With a combined system sales of $23 billion, the new company will now have over 18,000 restaurants in around 100 countries. The company will be headquartered out of Canada, where corporate taxes are lower as compared to the U.S. (See Burger King-Tim Hortons Cross-Border Merger Much More Than Tax Inversion)

Tim Hortons, known for its coffee and doughnuts, is a dominant fast food chain in Canada with 4,546 system-wide restaurants spread mainly across Canada and the U.S. [3] The company’s reported a 9% increase in net revenues year-over-year (y-o-y) in Q2 2014, while the same store sales growth was 2.6% in Canada and 5.9% in the U.S. [4]

Apart from the tax saving benefits due to the shift of headquarter in Canada, this deal might help Burger King to boost its top-line performance and expand its reach in another lucrative market. Even though it might not be enough to outpace the industry leaders, it might put them in a better position to shrink the gap. Moreover, this deal fits perfectly with the company’s new business model, where the American company focuses more on international expansion. Tim Horton’s versatile food offerings for the breakfast segment might help Burger King compete against the likes of McDonald’s(NYSE:MCD), Dunkin’ Brands (NASDAQ: DNKN) and Starbucks (NASDAQ: SBUX). The merger will not only provide a boost to the revenue growth, but help them in penetrating the Canadian market as well. Burger King has more than 7,000 restaurants in the U.S., leaving them with a little expansion growth in the domestic market. With around 280 restaurants in Canada, Burger King might look to expand its customer base in that region.

Stiff Competition Slows Down Customer Traffic

According to the NPD’s foodservice market research, the customer traffic growth in Quick Service Restaurants (QSRs) was considerably flat during the year ending June 2014, whereas the visits to fine dining restaurants rose 3% during the same period. [5] Fast-Casual restaurants, such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread, are gradually stealing the market share from QSRs with more average spend per visit and better customer traffic growth. Even though fast-casual restaurants lag their fast food counterparts in overall revenues and value, they are closing the gap every quarter. Moreover, people with higher disposable income are inclined more towards high quality and fresh food. This has led to a decrease in customer traffic gradually. Burger King has taken several measures such as new innovative menu additions in order to appeal to the health conscious customer base,  as well as the re-modelling of its various stores for more seating space and an inviting ambiance.

The battle for breakfast market share has also intensified, with McDonald’s leading the market with 25% market share in 2013. To attract customers during the breakfast hours, the company has introduced new innovative menu items, such as Chicken Big King, Orange Freeze and Chicken Big King. Burger King started serving the Starbuck’s owned Seattle’s Best coffee to compete against McDonald’s McCafe. [6] With coffee being the core beverage in the breakfast menu, Burger King plans on expanding this segment to match the brand appeal of McDonald’s McCafe and Starbuck’s coffee.

Burger King To Accelerate International Expansion

The company’s major focus is on expanding its brand presence around the globe. In the second quarter, the company accelerated its expansion plans with net 131 new openings and 682 net new stores in the trailing 12-month period, making it one of the fastest growing QSR in the industry. The company believes that markets such as France and India have a lot of growth potential. In these countries, the fast food hamburger industry has been performing well over the last decade. Big brands such as McDonald’s, Starbucks and Dunkin’ Donuts have already penetrated these markets and are performing very well. Burger King returned to France when it opened its brand new store at the Marseilles airport in 2012. [7] This was followed by another restaurant near Reims. Following its success in these stores, the company announced that it will open 350-400 restaurants throughout this burger loving country.

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Notes:
  1. Burger King Worldwide: Q2 2014 earnings call transcript []
  2. World’s third largest quick service restaurant company launched with two iconic and independent brands []
  3. Tim Hortons Q2 2014, 10-Q SEC filing []
  4. Tim Hortons Earnings call transcript, Q2 2014 []
  5. Income gap and shrinking middle class take a toll on restaurant industry []
  6. Burger King serves Seattle Best Coffee []
  7. Burger King returns to France []