Whoa! Did the Big King Save Burger King…Big Time?

No wonder McDonald’s is back to focusing on its core.

May 16, 2014 at 4:58PM

Source: Burger King

Burger King Worldwide (NYSE:BKW), like McDonald's (NYSE:MCD), wasn't immune to the effects the harsh winter weather had on the fast-food industry in the first quarter. Yet Burger King was able to still keep its head above the ice and squeeze out domestic same-store sales growth in the black. While I and others have been speculating for some time about the new Big King sandwich, the verdict is finally in: The Big King is a winner.

The royal results
Burger King reported fiscal first-quarter results on April 25. Global system-wide sales popped 6.9% in constant currency. Same-store sales bumped up 2% with a 0.1% uptick in the U.S. and Canada. Adjusted earnings per share soared 19.7% to $0.20 per share.

In terms of growth numbers, Burger King's results trampled McDonald's. McDonald's only saw a 3% increase in global system-wide sales, a 0.5% rise in same-store sales, and a 1.7% plunge in same-store sales in the U.S. and Canada. McDonald's blamed "challenging industry dynamics and severe winter weather."

The "challenge" in part was probably Burger King. Daniel Schwartz, CEO of Burger King, stated in the earnings release:

Despite severe winter weather in the U.S. and Canada, our commitment to launching fewer, more impactful products and simplifying in-restaurant operations helped drive improved performance.


Source: Burger King

The domestic picture is bigger than you think
The conference call was short but filled with goodies. The recurring theme throughout the less-than-40-minute call was "few, more impactful products," "adding fresh new tastes without adding operational complexity to its kitchen," and "compelling value without sacrificing operational efficiency," which are all kind of different ways of phrasing the same thing.

This is exactly what guests, shareholders, bloggers, analysts, and financial writers have been screaming at McDonald's to do for some time. Burger King listened. Why didn't McDonald's?

While the tiny uptick in domestic same-store sales of 0.1% doesn't sound like much, something within that quarter is what's most encouraging. March was stated in the conference call as one of the best months in Burger King history. And this was during what Burger King considers a seasonally slow quarter anyway, regardless of the weather.

What went on in March
McDonald's saw around a 0.4% dip in domestic same-store sales during the quarter, so it wasn't a universal record across the industry. What McDonald's didn't have, though, is a Big King sandwich or a spicy chicken sandwich launch in the quarter. Big King 2.0 came out, and it's 25% bigger than McDonald's Big Mac. Burger King plastered that fact across its advertising. Ouch!

Keep in mind McDonald's didn't build its loyal Big Mac fan base overnight. McDonald's isn't likely to lose it overnight either, but Burger King may very well be on its way to taking a bit out of McDonald's burger business. McDonald's admitted on its last conference call that it needs to continuously communicate its core menu for things such as the Big Mac, so it at least realizes that Burger King attacked when its guard was down.

Two more potential clues were mentioned on the conference call. First, it was stated that the Big King "continues to be a guest favorite." That is the first time, from what I can tell, that Burger King referred to the new sandwich as a "favorite" item. It's not easy for any restaurant company to convert a new item into a favorite that quickly. Second, it was stated that Burger King plans to "take the U.S. to the next level in terms of sales in a sustainable way," which makes you curious about April and beyond.

Bottom line
Could the Big King do for Burger King what the Doritos Locos Tacos did for Taco Bell? Could this potentially turn into a major problem for McDonald's? We all like variety, but it would seem unlikely that many people would float back and forth between the Big Mac and the Big King considering how similar they are. McDonald's is the one with everything to lose in this battle that is new for Burger King. That is, unless McDonald's comes out with a McWhopper.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and 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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