Should You Invest in This Burger King Franchisee or Burger King Itself?


Source: Carrols

Burger King Worldwide (NYSE: BKW  ) is the world's second-largest fast-food hamburger restaurant chain, boasting a fully franchised store footprint of more than 13,000 restaurants in 90 countries. These restaurants serve more than 2.3 billion customers and contribute to over $16 billion in system-wide sales every year.

While the numbers above make Burger King Worldwide sound like an interesting potential investment, its growth prospects are less attractive given its size. In fiscal 2013, Burger King Worldwide's system-wide comparable sales grew by a mere 0.5%; its system-wide sales increased by 4.2% over the same period.

Investing in Carrols Restaurant Group (NASDAQ: TAST  ) , the largest Burger King franchisee with 564 restaurants, may be a more attractive proxy for the iconic Burger King. Between 2010 and 2013, Carrols almost doubled its revenues to $663.5 million in 2013 and increased its restaurant-unit count from 305 in 2010 to 564 in 2013. Does this make Carrols a better investment than Burger King Worldwide?


Source: Carrols

Benefiting from Burger King's transformation initiatives
Since 3G Capital took over Burger King Worldwide in 2010 and put a new management team in place, Burger King Worldwide has embarked on a series of strategic initiatives to improve its business.

With respect to its menu, Burger King Worldwide has added new items to its core portfolio such as chicken strips, crispy chicken wraps, and french fries; it also expanded its breakfast, beverage, & dessert platforms. In terms of marketing & promotion, Burger King Worldwide found its existing target-customer demographic (18-35 year old males) too narrow and began to broaden its appeal across a wider demographic range in 2012. This included targeting new customers such as children, seniors, and women.

Burger King Worldwide has also started to segment its customers more finely with the introduction of more premium products, value products, & menu combinations to meet varying needs.

Carrols has been a key beneficiary of these initiatives by Burger King Worldwide as it has recorded 10 consecutive quarters of same-store sales growth and grown restaurant-level EBITDA from $46.4 million in 2010 to $70.2 million in 2013. Notably, Carrols is reimaging another 450 units this year to align them with Burger King Worldwide's new 20/20 restaurant imaging program, after completing more than 200 remodels in 2012 and 2013.

The new 20/20 restaurant design helps boost customer traffic by employing distinctive graphics and incorporating a variety of self-seating options and LCD menu screens for guests. Based on its internal estimates, Carrols has experienced a 10% average sales lift for its previously remodeled stores.

The proof of the pudding is in the eating. For the past 10 quarters, Carrols' comparable-sales growth has been higher than that of Burger King Worldwide's North American restaurants in every single quarter. Carrols also outperformed corporate-owned Burger King restaurants with respect to restaurant-level EBITDA margins. This suggests that it's better to invest with a high-quality operator like Carrols. In contrast, investing in Burger King Worldwide would be as good as putting your monies with a hotch-potch of franchisees with varying quality.

Room for further upside
As the second-largest fast-food hamburger restaurant chain globally, it would be challenging for Burger King Worldwide to grow from such a large base by adding new franchisees. In comparison, Carrols has already been assigned the right of first refusal, or ROFR, to potentially acquire more than 2,000 restaurants from Burger King franchisees in 20 states.

More importantly, Carrols has reached an agreement with Burger King Worldwide under which it doesn't require additional approval from Burger King Worldwide to acquire more franchised restaurants until it hits the 1,000 restaurant mark.

Foolish final thoughts
Looking ahead, Carrols should continue to benefit from Burger King Worldwide's transformation initiatives and increased sales from remodeled restaurants.

Furthermore, it should witness exciting new store growth in the next few years as it exercises its ROFR to acquire more franchised restaurants from Burger King Worldwide. I choose Carrols over Burger King Worldwide, as it is a better operator and has more promising growth opportunities.

 

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