VALUATION HIGHLIGHTS

1. TH Restaurants constitute 69% of the Trefis price estimate for Restaurant Brands International Inc.'s stock.
2. BK Restaurants constitute 19% of the Trefis price estimate for Restaurant Brands International Inc.'s stock.
3. PLK Restaurants constitute 10% of the Trefis price estimate for Restaurant Brands International Inc.'s stock.

WHAT HAS CHANGED?

QSR Saw A Mixed Q4

QSR's Q4 revenues grew 10% year-over-year (y-o-y) to $1.69 billion, fueled by strong same-store sales growth from Burger King's overseas restaurants. The company's consolidated comparable sales were up nearly 8% in Q4, led by 11% growth at Tim Hortons Canada and Burger King International. However, its adjusted earnings fell 3% y-o-y to $0.72 per share. But full-year adjusted EPS was up 11% y-o-y to $3.14. The improvement was primarily driven by an income tax benefit in the current year and a non-recurrence of a loss on early extinguishment of debt. Restaurant growth accelerated to 1,266 net new units with Popeyes delivering its strongest development year since joining the brand.

QSR included results from its franchised restaurants in Russia within reported key business metrics, but it did not generate any profits from restaurants in Russia in 2022. During the fourth quarter, the non-recurrence of 2021 profits from these restaurants had an estimated $11 million, or 2%, negative impact on y-o-y organic adjusted EBITDA growth. Consequently, beginning in the first quarter of 2023, the company intends to report its key performance indicators excluding the results from its franchised restaurants in Russia.

Note: QSR's FY'22 ended on December 31, 2022.

BUSINESS SUMMARY

QSR is one of the largest fast-food restaurant chains in the world and it is a combination of Burger King, Tim Hortons, Popeyes, and, since late 2021, also Firehouse Subs. As of December 31, 2022, Burger King had 19,789 stores, Popeye's Louisiana Kitchen had 4,091, Tim Hortons had 5,600 stores, whereas Firehouse Subs had 1,242 restaurants.

Burger King's restaurants fall into the quick service restaurants category that features flame-grilled hamburgers, fish and chicken combos, french fries, soft drinks, and other affordable food items. Burger King restaurants appeal to a wide range of consumers, with multiple dayparts and product platforms appealing to varied customer groups. The fast-food chain competes with McDonald's and Wendy's in the Fast Food Hamburger Restaurant (FFHR) category.

Tim Hortons restaurants are quick-service restaurants with a menu that includes premium blend coffee, tea, espresso-based hot and cold specialty drinks, fresh baked goods, including donuts, bagels, cookies and pastries, grilled paninis, classic sandwiches, wraps, soups, and more.

Popeyes Louisiana Kitchen is a chain of quick-service restaurants that distinguish themselves with a unique “Louisiana” style menu that features spicy chicken, chicken tenders, fried shrimp and other seafood, red beans and rice, and other regional items. Popeyes is a highly differentiated QSR brand with a passion for its Louisiana heritage and flavorful, authentic food. Restaurant Brands International acquired Popeyes Louisiana Kitchen (PLK) in March 2017.

Firehouse Subs is a leading player in the QSR sandwich category in North America. This brand was acquired by QSR on December 15, 2021.

SOURCES OF VALUE

Franchises' profit margins are four times that of company-operated restaurants

Company-operated restaurants are low-margin businesses (~10-15% operating margin) as compared to franchised restaurants (~70% operating margin). The difference in margins is mainly because of the extra costs involved with company-operated restaurants, such as employees and operational costs, which are absent from franchised restaurants.

As Restaurant Brands International looks to become a 100% franchised model, it will mean lower revenues but higher margins for the company.

KEY TRENDS

Rising popularity of fast casual restaurants

The fast-food industry faces strong competition from “Fast Casual Restaurants.” Restaurants such as Chipotle Mexican Grill and Panera Bread are more likely to appeal to health-conscious customers. They claim to offer fresher, healthier, and better quality food.

Aggressive international growth as the U.S. market saturates

More than 50% of Burger King restaurants are in the U.S. This figure is expected to remain stagnant in the next few years, owing to the saturation of the fast-food industry in the country.

Burger King has entered into joint venture agreements in various parts of the world to expand its business. In countries like China, Australia, Colombia, and South Africa, the company is set to open numerous new restaurants without deploying its capital. Going forward, most of the expansion will come from international markets where the company is expected to earn only royalties. Thus, the growth of the company in the next few years depends on its performance in the international markets.