On Jan. 13, Carrols Restaurant Group (NASDAQ:TAST), the largest franchisee of Burger King, reported preliminary fourth quarter 2019 results. Not all financial results were given, but it did report full-year 2019 revenue and comparable sales, both of which were in line with full-year guidance given in the third quarter 2019 earnings call.
However, despite hitting guidance, the stock sold off slightly as investors digested weak comp-sales from Burger King. In Q3, Burger King comp-sales were stellar -- rising 5% year over year. And if not for an operator error, comp-sales would have risen over 7%, in large part thanks to the launch of the Impossible Whopper. However, in Q4, comp-sales rose a paltry 2%.
What it means for Carrols
In February 2019, Carrols acquired Cambridge Franchise Holdings for $238 million. Cambridge had 221 Burger King and Popeye's locations at the time. But the buyout deal included a reworked franchise agreement with Restaurant Brands International (NYSE:QSR) which allows Carrols to open 200 Burger King locations and 70 Popeye's locations over the next six years.
Additionally, Carrols has the right of first refusal to acquire up to 500 more Burger King locations. Considering Carrols had just 849 locations at the time of the acquisition, this was a massive long-term growth deal.
Investors worry when comparable sales weaken, especially when a chain is opening new locations. Expanding as the brand loses popularity can be a bad move for any restaurant stock. However, it's not time to panic just yet -- comp-sales growth is merely slowing, not going backwards.
More important for investors is Carrols' profit margin. In Q3 2019, restaurant-level EBITDA margin was 10.7%. That margin was negatively affected by the underperforming Cambridge portfolio. To remedy this, Carrols is investing to retrain labor, improve point of sales, and leverage food costs. Those efforts should start bearing fruit next quarter and throughout 2020.
What it means for Restaurant Brands International
Carrols comp-sales often outperform Burger King as a whole, so Carrols preliminary results might offer a sneak peek of upcoming Restaurant Brand International's (RBI) results. Burger King's comp-sales in Q3 were the strongest since 2015, so investors might not enjoy seeing them slow down next quarter.
However, Popeye's results reported by Carrols shouldn't be overlooked. At Carrols's Popeye's locations, comp-sales were up a massive 21%. It seems Popeye's new chicken sandwich is still a hit.
Looking back to Q3, comp-sales were up 9% at Popeye's, reported by RBI. Given the 21% comp-sales growth reported by Carrols, investors should expect Popeye's comp-sales growth to accelerate in Q4 2019 for RBI -- which is an encouraging sign as the company prioritizes Popeye's growth.
Keep in mind that Popeye's sales only account for about 12% of RBI's sales, so even a massive comparable-sales gain at Popeye's won't be as meaningful to overall results as Burger King's comparable sales.
What it means for plant-based meat
When it comes to plant-based meats, like the Impossible Whopper, initial response has been strong. As we've already noted, comparable sales soared in Q3 2019 at both Carrol's and Restaurant Brands International, largely due to the Impossible Whopper's nationwide debut on August 8th.
Further, Del Taco saw a comp-sales boost when it added menu items from Beyond Meat (NASDAQ:BYND) in the second quarter of 2019.
But the mainstream rise of plant-based meat is still very fresh, and questioning the extent of long-term demand is a good idea. For example, in Del Taco's Q2, the Beyond Meat menu items were over 6% of sales. In the third quarter, this dipped slightly to 6%. But now Del Taco has stopped aggressively advertising it, and preliminary fourth quarter results show the Beyond Meat menu down to 4% of sales.
Surely there is some long-term demand for plant-based meats. But just how much demand will there be? That remains to be seen.
This was just a preliminary earnings report, but there are three main takeaways for investors.
First, with Carrols, watch for improvements at previous Cambridge locations. Those locations account for over 20% of Carrols locations, and it would be a red flag if those locations don't have measurable profitability improvements in Q4.
Second, Restaurant Brands International is expected to report earnings on Feb. 10, and it could be a tough one for comp-sales. That could cause the stock to sell off a little.
Finally, for Beyond Meat, investors should continue monitoring sell-through of plant-based meats at restaurants to keep a finger on the pulse of overall consumer demand.