Burger King Worldwide Inc.’s (BKW) third-quarter adjusted earnings per share of 23 cents beat the Zacks Consensus Estimate of 21 cents by 9.5% and increased 35.3% year over year. Increased adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and lower company restaurant expenses contributed to the earnings growth.
Revenues & Margins
Burger King’s total revenue dropped 39.6% year over year to $275.1 million due to the adverse impact of refranchising, lower company restaurant sales and sluggish comparable sales (comps). However, quarterly revenues beat the Zacks Consensus Estimate of $266.0 million by 3.4%. Organically (excluding the impact of refranchising and currency), revenues were up 8% in the quarter thanks to net restaurant growth and positive comps at Europe, Middle East and Africa (EMEA), Latin America and the Caribbean (LAC) and Asia Pacific (APAC) regions.
Organic adjusted EBITDA grew 16.7% year over year to $176 million with solid EBITDA growth across North America, EMEA and APAC and lower general and administrative expense (G&A). Adjusted EBITDA margins were 64%, significantly higher than the year-ago level of 35.7%, driven by refranchising efforts and cost containment initiatives.
Food, paper and product costs as well as occupancy and other operating costs ratio were considerably lower in the quarter.
Comps Discussion
Overall comps in the quarter nudged up 0.9% but were lower than the year-ago quarter’s comps of 1.4% owing to a 0.3% decline in the comps at U.S. & Canada. Comps grew a respective 2.4%, 2.1% and 3.7% in EMEA, LAC and APAC. The APAC region performed better in the quarter as against negative comps of 2.2% in the year-ago quarter.
Segment Results
A still-anemic macroeconomic environment and stiff competition led to the decline in U.S. & Canada comps. However, Burger King remains steadfast in executing its Four Pillars strategy in this region that includes menu improvements, marketing initiatives, operational efficiency and re-imaging in U.S. & Canada.
The success of the “Trial Weeks” value promotion in Germany, and EUROKING(TM) as well as KING AHORRO value promotions and the couponing initiatives in Spain facilitated comps growth in the EMEA region.
LAC region posted positive comps in the third quarter gaining from solid traffic growth in Brazil offsetting the poor performance in Puerto Rico and Mexico. The company’s advertising activities boost sales in Brazil. In an attempt to resist the downfall in comps, management has altered the menu and has undertaken promotional strategies in Puerto Rico to increase traffic
In the APAC region, Australia continues to be the star performer. China and Korea are also better-positioned in the quarter benefiting from the company’s value promotions and menu improvement initiatives.
Refranchising & Re-imaging
During the third quarter of 2013, Burger King refranchised 19 units in Spain bringing the refranchising initiative to an end. Burger King seeks to re-image at least 40% of its U.S. & Canada restaurants by 2015.
Our Take
Even though Burger King posted higher earnings in the quarter, its revenues are declining continuously for the past few quarters mostly due to the fragile U.S. economy. Government budget cuts, high tax rates and still-tightened credit availability continue to hurt consumers’ discretionary spending. Also, weak economic conditions in Europe remain a headwind.
Other Stocks to Consider
Burger King currently carries a Zacks Rank #4 (Sell). Some other players in the restaurant industry which look attractive at the current level include Red Robin Gourmet Burgers Inc. (RRGB), Cracker Barrel Old Country Store, Inc. (CBRL) and Bob Evans Farms, Inc. (BOBE). While Red Robin holds a Zacks Rank #1 (Strong Buy), Cracker Barrel and Bob Evans Farms carry a Zacks Rank #2 (Buy).
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