Florida-based Burger King Worldwide Inc. (BKW) reported third-quarter results, wherein earnings per share were in line with the Zacks Consensus Estimate. However, Share price of this restaurateur dropped 0.3% as revenues missed the consensus mark.
Burger King’s third-quarter 2014 adjusted earnings per share of 27 cents were in line with the Zacks Consensus Estimate. Also, earnings increased 18.4% year over year driven by higher revenues.
Burger King’s total revenue increased 1.4% year over year to $278.9 million due to comps growth. Quarterly revenues, however, missed the Zacks Consensus Estimate of $281.0 million by 0.7%.
Organically (excluding the impact of refranchising and currency) however, revenues increased 5.2% year over year due to net restaurant growth and comps growth.
Comps Discussion
Overall comps in the quarter nudged up 2.4%, higher than both the prior-year quarter comps growth and the prior quarter comps growth of 0.9%. The growth was mainly driven by comps growth in the U.S. and Canada, Europe, the Middle East, and Africa (EMEA) and Asia Pacific (APAC).
Segment Results
Burger King witnessed 3.6% comps growth in the U.S. & Canada, up from the prior-quarter comps growth of 0.4%, and considerably better than the year-ago quarter’s decline of 0.3%. The reintroduced Chicken Fries drove the company’s sales in the U.S. and Canada.
Comps grew 1.3% in the Europe, the Middle East, and Africa (EMEA) region, a rise from prior-quarter level of 0.9% but down from the year-ago quarter’s level of 2.4%. Although the segment delivered its 15th consecutive quarter of comps growth, weak performance in Germany offset the strength in Turkey, the United Kingdom and Spain. EMEA system-wide sales growth of 11.3% was primarily driven by 341 trailing twelve months (TTM) net restaurant openings.
The Latin America and the Caribbean (LAC) region posted comps decline of 3% in the quarter, versus comps growth of 1.1% in the prior quarter and 2.1% in the year-ago quarter. Weakness in Mexico and Puerto Rico hurt comps in the quarter. LAC system-wide sales growth of 8.7% was primarily attributable to the impact of 161 TTM net restaurant openings.
The Asia Pacific (APAC) region continues to perform well with 4.1% comps growth, better than the year-ago quarter’s and prior-quarter’s level of 3.7%. The comps growth was driven by strong business across Australia and South Korea. APAC system-wide sales growth of 23.3% was primarily driven by 235 net restaurant openings over the past 12 months.
Margins
Organic adjusted EBITDA grew 11.9% year over year to $194.4 million with solid EBITDA growth across EMEA, LAC as well as the APAC region.
Selling, general and administrative expenses increased 31.4% year over year to $78.3 million. Total operating costs and expenses increased substantially year over year to $278.0 million.
Our Take
Despite posting in line earnings in the quarter, Burger King’s revenues in this quarter were soft due to difficult consumer discretionary environment in the U.S. and the sluggishly recovering economy, which continues to hurt consumers’ discretionary spending.
However, Burger King’s menu improvement initiatives, reimaging efforts and marketing promotions are expected to bode well. Additionally, we are encouraged by its cost cutting initiatives which are expected to boost bottom-line growth in the upcoming quarters.
Amid these upsides, we cannot ignore the criticism faced by the company owing to its merger deal with Tim Hortons Inc. (THI). The merger would create one of the largest fast food companies in the world, with a market value of roughly $18 billion. The combined business would generate about $22 billion in sales and constitute more than 18,000 restaurants in 100 countries.
However, the deal did not find favor with the White House as it is being considered as a tax inversion deal, with the parent company's headquarters planned to be relocated to Ontario, Canada. Also, a number of social media users reportedly expressed their dissatisfaction over the deal.
Burger King Worldwide currently has a Zacks Rank #3 (Hold). Some other stocks that are performing well in the restaurant industry include BJ's Restaurants, Inc. (BJRI) and Ruby Tuesday, Inc. (RT). Both these restaurants sport a Zacks Rank #1 (Strong Buy).
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