Burger King Flips Its Stores for Growth

We're still getting mixed signals on the economy, but if the path Burger King Worldwide (NYSE: BKW  ) is following is any indication, things may indeed be improving.

The burger joint reported third-quarter earnings yesterday, with profits soaring year over year to $68 million, or $0.019 per share, from less than $7 million a year ago, but revenues tumbled almost 40% to $275 million. As bleak as that sounds, it's actually a quite positive development for Burger King.

The restaurant operator had refranchised 519 restaurants during the past year, which, if removed from results, would have actually resulted in an 8% increase in sales. Refranchising is the process of selling company-owned stores back to franchisees, a trend we've been witnessing more often lately. Wendy's began refranchising 425 stores this past summer amid something of a recovery by turning around its operations and generating profits from losses in the year-ago period.

The movement signals there is money available for franchisees to borrow, and we've seen both DineEquity (NYSE: DIN  ) and Yum! Brands (NYSE: YUM  ) do likewise with their chains. Following its acquisition of the Applebee's chain in 2007, the division is now almost a wholly franchised operation within DineEquity, which is also in the process of rolling over its IHOP pancake houses. Similarly, Yum! has refranchised all of its U.K.-based Pizza Hut restaurants while methodically refranchising its Taco Bell stores here at home.

Although revenues take a hit initially, the concept reduces the parent company's overhead while providing it a generally stable stream of income. But it's a delicate balance, as strong operators need to be installed so that you don't end up with a drag on overall performance.

And that's the care Burger King needs to take, because domestically, comps were down 0.3% even if they were higher overall. It admits the economy remains soft and competition fierce. Like Wendy's, it has been upgrading its stores to create a more lounge-like atmosphere to steal some of the fast-casual dining concept thunder, but like McDonald's (NYSE: MCD  ) , it has also had to break the buck on its value meals to enhance profitability. Yet McDonald's has tied itself so closely to the dollar menu that it's unable to go beyond that and recently had to kill its Angus beef burgers because costs were rising and competition from its own low-cost offerings made it difficult to keep.

While Burger King is following in the footsteps of others when it comes to refranchising, as its BK Delivers home delivery option continues to prove popular with customers, we're likely to see rivals launch their own competing service. Even so, following some strong comparable numbers in 2012, same-store sales turned negative this year and though they've been slowly mending themselves, the delivery service doesn't seem to have affected the change the burger joint was counting on.

Burger King shares are nearly 50% higher from where they were a year ago, but we'll need to wait and see whether it can continue flipping them higher.

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