Diageo is preparing to sell parts of its Burger King chain to the public. But while investors may salivate over those tasty Whoppers, the company needs to settle some leadership issues and show better sales momentum before Fools rush in for lunch and ownership.

By Dave Marino-Nachison (TMF Braden)
July 11, 2000

Shares of London food and drink conglomerate Diageo (NYSE: DEO) didn't move much in morning trading today, which isn't particularly notable. Neither did they move much yesterday, though the U.K.'s Guardian newspaper was first to the world with the story that the company would today issue a trading update detailing downbeat expectations for sales at its quick service restaurant operation.

The company today said quick-service sales -- the company operates Burger King -- are expected to come in about 6% above last year's levels for fiscal 2000 (ended June 30). Global-same restaurant sales, though, are seen coming in flat for the year as U.S. "comp sales" growth is at about 2% for the year thus far.

We'll skip over the fact that the Guardian must have had a pretty good source for its story -- none were named, however -- since this apparent case of what we'll call "sketchy disclosure" didn't prompt huge gains or losses for individual investors. (Yes, giving key business information to a lone reporter can, in some cases, be just as potentially destructive as giving it to an analyst. How many folks in your neighborhood read the Guardian each morning?)

What's more important in the long term might be the developing story of Burger King, which Diageo is gearing up for possible partial flotation on the New York Stock Exchange. The company's brand is certainly well-known and its Whopper is certainly one of the best-known -- if not the healthiest -- sandwiches in the world of ground beef. But is that enough to get investors excited about the chance to own the company?

Diageo, as a whole, has significantly underperformed the Standard & Poor's 500 index over the last five years and investors looking for growth presumably want signs of better things to come. Diageo's operating profit growth for the quick-serve division last year was the slowest of all its divisions (it is also the smallest in terms of total profits) and today's news doesn't clear up that picture significantly.

Also on the horizon are the potential future costs and benefits of a transformation program in the U.S., in which Burger King's stores and drive-throughs will be improved, and expanded offerings at the $0.99 price point. All this is going on while the company looks for new leadership for Burger King: CEO Dennis Malamatinas will resign August 30 and the company is looking for a replacement to lead an initial public offering. Whoever steps in will likely need experience in international markets since, as noted by Fool Rick Munarriz in this May feature, much of the long-term growth opportunity for the likes of Burger King and McDonald's (NYSE: MCD) is overseas.

Simply put, there are a lot of questions out there Burger King will have to answer for Fools before the company is ready to demonstrate its worthiness as a long-term holding. Some of those questions -- the leadership issue, for example -- will hopefully be answered before the offering.

But investors may also want to consider that Diageo, which ultimately wants to float all of Burger King, is developing into a different sort of investment opportunity as it focuses on its higher-growth alcohol businesses. Luxury goods purveyor LVMH Moet Hennessy Louis Vuitton (Nasdaq: LVMHY) also got a lot of "pop" out of its champagne and liquors operations last year (it slowed in first-half 2000), though it has been trimming its stake in Diageo in the meantime.

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