3 Restaurants Defying Industry Trends

Industry-wide sales and traffic trends in the restaurant industry haven't been very encouraging this year according to a report from Blackbox Intelligence. In fact, traffic growth in September was a negative 1.9% for the entire industry. In addition, industry-wide same-store sales for the third quarter were down 0.2%, which represents a 0.6% sequential drop. As a result, it isn't surprising to find many restaurants reporting weak results.

However, Sonic (NASDAQ: SONC  ) , Burger King Worldwide (NYSE: BKW  ) , and McDonald's (NYSE: MCD  ) have managed to buck the trend, as evident from their latest quarterly reports.

Sonic's booming growth
Sonic posted its fourth-quarter fiscal 2013 results with earnings in-line and revenue better than consensus estimates. Consolidated comps grew 5.9%, thanks to the Summer of Shakes promotion and the limited-time pretzel dogs offer.

As a result of strong comps growth, Sonic reported a 5.2% year-over-year growth in revenue to $158.8 million, and beat consensus estimates of $152 million. On the back of strong top-line growth, Sonic reported 20% growth in earnings versus the same quarter a year ago to $0.30 per share.

Substantially better comps performance at both company-owned as well as franchised stores, despite weak industry trends, indicates that Sonic is moving in the right direction. Sonic expects that comps growth will pick up in the second half of the year with the implementation of a new point-of-sale system and digital point-of-purchase technology.

Sonic also expects positive same-store sales in low-single digits for fiscal 2014 as a result of closing underperforming units, a focus on smaller units for a better return on invested capital, and increased marketing. The company also plans to open 40-50 new franchised drive-ins in 2014. All these initiatives are expected to increase fiscal 2014 earnings by 14% to 15% versus fiscal 2013.

Burger King's expansion spree
Burger King, on the other hand, saw a smaller growth of 0.9% in comps in the third-quarter. Had it not been for comps growth in Europe, Middle East, and Africa, or EMEA, Latin America, and Asia Pacific, comps would have been negative as the U.S. & Canada registered a 0.3% decline. For this region, Burger King is already working on executing its Four Pillars strategy that includes menu improvements, marketing initiatives, operational efficiency, and reimaging.

Refranchising caused a 39.6% year over year drop in revenue for Burger King. Excluding that, revenue shot up 8% as a result of positive comps growth in EMEA, Latin America, and Asia Pacific. In fact, the Asia Pacific region displayed the best growth figures versus the year-ago quarter.

Helped by these markets, Burger King's consolidated revenue came in at $275.1 million, which beat consensus estimates. Third-quarter adjusted earnings per share came in at $0.23 per share, up 35.3% year over year and ahead of consensus estimates .

Burger King launched a new product called Satisfries, which it expects to help in boosting sales. Satisfries are a healthier alternative to regular fries. This may prove to be a good move when positioned against McDonald's apple slices. Burger King has been on an expansion binge, opening 592 new restaurants in the last 12 months, and this should lead to higher revenue in the future.

Burger King also increased its dividend by 14.3% to $0.07 per share. It offers a modest dividend yield of well under 2%, but a boost is always encouraging because it indicates management's confidence about the company's future.

McDonald's in choppy waters
McDonald's, incidentally, also had a 0.9% comps growth during the third quarter versus 1% in the second-quarter and 1.9% in the year-ago period. The decline in comps was more in line with the industry-wide trend due to the lower consumer spending as a result of the economy, a choppy job scenario, and higher payroll taxes. As a result of these, McDonald's posted revenue growth of 2% year over year to $7.32 billion and missed consensus estimates .

Looking ahead, McDonald's is focusing more on locally relevant items and expanding its breakfast line-up. It is also looking to offer more value options, better services, convenience initiatives, and restaurant developments as part of an initiative to boost comps.

The fast food chain, with its strong brand, is focusing on its innovative offerings and premium products across all regions to boost its performance. As a result of value propositions and menu adjustments, McDonald's has succeeded in posting year-over-year increases in earnings and revenue in the past two quarters. However, the company has become vulnerable to macroeconomic headwinds like debt concerns in Europe, muted growth in Asia, and intense competition in the U.S.

Bottom line
McDonald's has been the weakest performer of these three quick-service restaurants this year. Its share price gain of 10% underwhelms Sonic's 80% rise and Burger King's 26% jump. However, conservative investors would probably like McDonald's due to its juicy dividend yield of 3.10% and relatively cheaper valuation at a P/E of 18 times trailing earnings.

Investors looking for growth should take a closer look at Burger King and Sonic, as both of them have been expanding and remodeling stores, launching new menu items, and are each expected to grow earnings at a compound annual growth rate of around 15% over the next five years  .


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