Burger King May Be Winning the Burger War With McDonald's

Burger King's latest results trump McDonald's. Could there be a new No. 1 among the hamburger chains?

Feb 18, 2014 at 4:08PM

It's the tale of two hamburger chains. One is the largest in the world and the other is the second largest. Both have been competitors for more than 50 years. For the better part of that half-century, McDonald's (NYSE:MCD) has gotten the better of Burger King Worldwide (NYSE:BKW). But lately, McDonald's has hit a rough patch, and Burger King has been quick to take advantage of its larger competitor's  weakness. Now that both chains have released their fourth-quarter results, it's time for us Fools to dig in and see what's juicy.

Burger King's fourth quarter trumps McDonald's
Burger King's fourth-quarter results were much more appetizing than McDonald's. Burger King's global comparable sales increased 1.7%, while McDonald's posted a global comparable sales decrease of 0.1% in the fourth quarter. Beyond that, there were several more items in Burger King's report that looked better than McDonald's.

Overall, Burger King saw systemwide sales growth of 5.7%. Adjusted earnings before interest, taxes, depreciation, and amortization grew an impressive 14.3%, while earnings per share grew only 4.4% compared to the prior year. Burger King opened 408 new locations in the fourth quarter, and for all of 2013, the company opened 670 net new restaurants.

The fourth quarter was strong for Burger King because it was the first full quarter that the company had the Big King, BBQ Rib Sandwich, and new French fries called Satisfries on the menu. All three menu items helped to drive traffic into Burger King locations and boost sales. Foot traffic was further boosted by Burger King's new remodeling campaign, with about 30% of U.S. and Canadian locations having a newer, fresher look.

McDonald's numbers aren't that impressive
Overall, revenue increased only 2%. Operating income was flat in the fourth quarter and earnings per share were up 1% on a lower share count due to share buybacks. For McDonald's, its U.S. operations remain a serious weak spot. Comparable sales for U.S. stores fell 1.4% in the fourth quarter. Share buybacks and dividends were bright spots for investors, with McDonald's returning $1.3 billion to shareholders in the fourth quarter.

Outlook for 2014
Burger King is focused on continuing to update its existing locations with its remodeling program. By 2015, the chain expects to have 40% of all locations refurbished. Locations with the new look have seen a 10% to 15% boost in sales, which justifies the $300,000 to $350,000 cost of the remodel per location.

This year Burger King is hoping its new menu items continue to drive sales. Most notably among these menu items is the Big King, which Burger King is hoping to be a Big Mac killer. Burger King is also hoping its revamped breakfast menu can grab some of McDonald's dominance in that day-part.

McDonald's plans on being aggressive this year to make up for last year's lost sales. This year the company plans to spend about $3 billion to open 1,500 to 1,600 new restaurants and remodel 1,000 existing locations. McDonald's looks to also reward shareholders with more than $5 billion in dividends and share repurchases.

McDonald's biggest problem appears to be that the company keeps tinkering with its menu. The chain keeps hoping for a new blockbuster menu item that will propel sales, and so far it hasn't found that item. In the last year, McDonald's has tried chicken wings, sought to challenge Starbucks in coffee, and expanded its Dollar Menu. Hopefully, this year McDonald's will either simplify its menu or offer up a new menu item that resonates with its customers.

How do shares look?
Burger King trades at 27 times next year's earnings. Shares have risen an impressive 48% in the past year on the back of the company's refranchising initiatives. As Burger King has exited owning its locations, it has seen its operating margin rise to almost 45%. Burger King has more than $764 million in cash for investment this year.

McDonald's trades at only 15 times next year's earnings. Shares are up slightly more than 1% in the past year, as investors have been concerned about the sluggish sales growth seen at McDonald's locations. McDonald's still owns quite a large number of its own locations and doesn't have quite as high an operating margin as Burger King, but it still sports an impressive 30% operating margin. Investors remain attracted to shares of McDonald's for its 3.4% dividend yield, which is one of the highest in the restaurant space.

Foolish assessment
Right now, there's no arguing with the success Burger King is having against McDonald's. Burger King has the momentum and is delivering not only menu innovations but returns to shareholders, with share price appreciation in the past year. McDonald's, even though it's the largest hamburger chain in the world, is having to play catch-up to the No. 2 chain in the world. It certainly looks to be an exciting year as the burger wars continue.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. The Motley Fool owns shares of McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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