Restaurant Brands International Earnings Preview: Tim Hortons & Burger King Merger To Strengthen Revenue Stream

BKW: Burger King Worldwide logo
BKW
Burger King Worldwide

On August 26, 2014, the Canadian multinational fast-casual restaurant chain Tim Hortons and the American burger giant, Burger King (NYSE:BKW),  entered into an agreement under which the two recognized companies joined hands to create the World’s third largest quick service restaurant company. [1] The newly formed Restaurant Brands International Inc (TSX/NYSE:QSR) is scheduled to release its full year and fourth quarter 2014 fiscal results on February 17. [2] Restaurant Brands International Inc houses these two big brands, with a combined market value of roughly 8 billion. With a combined system sales of $22 billion, the new company now has over 18,000 restaurants in around 100 countries, headquartered in Canada, where corporate taxes are lower as compared to the U.S.  3G capital, the majority stake holder of Burger King, will continue to own majority shares (51%) of the new company. The new company is listed on the Toronto Stock Exchange, as well as on the New York Stock Exchange under the trading symbol QSR.

On December 10, 2014, these brands announced the results of the consideration elections made by the shareholders of the two companies prior to the election deadline. The preliminary results of the elections are available in the SEC filings provided by the company. [3] This is the first time when the combined company will report their earnings results since it began its operations on December 11, 2014.

We are currently in the process of incorporating Tim Hortons operations and revamping the structure for the company. Burger King’s Stock (BKW) jumped more than 22% from $27 to $33 after the company announced its merger with Tim Hortons. However, after the formation of the combined company, BKW stock stopped trading at $35.50 on the New York Stock Exchange on December 12, 2014. On the other hand, Tim Hortons’ Stock (THI) jumped more than 18% from $69 to $82 after the merger news, and rose gradually to $99 when it stopped trading on the Toronto Stock Exchange on December 12, 2014. However, the stock of the new parent company (QSR) jumped more than 14% since the beginning of its trading, and is now trading around $39.

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See full analysis for Burger King

Tim Hortons Addition To Boost Top-line Growth

Burger King delivered strong results in its third quarter earnings report on November 4, as it reported  a strong 2.4% year-over-year (y-o-y) increase in its global comparable store sales and a 7.7% y-o-y increase in the system-wide sales (constant currency). [4] The company’s Q3 revenues grew 5% y-o-y, partially driven by 5% net new store development. All the geographical segments delivered double digit organic growth. Moreover, the company’s adjusted EBITDA margins increased 570 basis points to 69.7%.

Known for its coffee and doughnuts, Tim Hortons is a well-known fast food service in Canada with 4,546 system-wide restaurants spread mainly across Canada and the U.S. [5] The company  reported a 10% increase in net revenues y-o-y in Q3 2014, while the same store sales growth was 3.5% in Canada and 6.8% in the U.S. The company’s adjusted operating income, which excludes the impact of costs associated with the transaction regarding the Burger King deal, grew 15% and earnings per share grew 25%.

  • Increase In Customer Base

The merger with Tim Hortons provides Burger King with everything from incremental revenues to expansion scope, from tax savings to better menu resources. 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 Hortons reported more than $3 billion in net revenues in 2013 at a steady growth rate and is consistent in its margins. However, it has struggled in the U.S., where food giants such as McDonald’s, Yum Brands, Dunkin’ Donuts, and Starbucks have unmatchable dominance. On the Other hand, Burger King has accelerated its international expansion over the last couple of years, as it is witnessing sluggish growth in the domestic market. As mentioned before, the new company will have combined system-wide sales of $23 billion, with a prominent growth potential, to compete against the fast-food giants like McDonald’s. McDonald’s reported around $27.4 billion net revenues in fiscal 2014. The merger will not only provide a boost to the revenue growth, but help them in penetrating the Canadian market. 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.

  • Prepared For Industry-wide Competition

The fast-casual segment is a fresh and rapidly growing concept, appealing to the health-conscious consumers. Brands such as Chipotle Mexican Grill (NYSE:CMG) and Panera Bread are considered  the top restaurants in this category. Regional burger chains in the U.S. such as In-N-Out Burgers, Five Guys, and Shake Shack are stealing a small portion of market share as well. According to the recent data, fast casual restaurants is the fastest growing concept in the industry in terms of customer count. Tim Hortons’ innovative menu items, well-established coffee and food offerings, and dominance in Canada, might help Burger King in off-setting the damage done to its revenue growth by the competitive activity. Also, the brand appeal of Tim Hortons might lay a smooth platform for Burger King to regain any lost customer traffic.

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Notes:
  1. World’s third largest quick service restaurant company launched with two iconic and independent brands []
  2. Restaurant Brands International 2014 fiscal earnings conference call []
  3. Burger King Worldwide, Tim Hortons and Restaurant Brands International announce expiration of election deadline []
  4. Burger King Worldwide: Q3 earnings call transcript []
  5. Tim Hortons Q3 2014, 10-Q SEC filing []