Restaurant Brands International (QSR -0.94%) reported third-quarter earnings earlier this week and managed to produce earnings per share (EPS) of $0.68 on revenue of $1.34 billion, above consensus projections of $0.63 EPS on revenue of $1.3 billion. Third-quarter revenue was down 8% year over year due to coronavirus precautions still in place at many of its Burger King and Tim Hortons restaurants. Revenue growth at its Popeyes restaurants did help partially offset declines elsewhere.
Most of the company's restaurant base is now open globally, with more than 96% of locations operating in some form at the end of the third quarter. While nearly all restaurants are operating in Asia, Europe, and U.S. markets, Latin America is slightly behind with about 92% open. This compares to about 50% of locations open during the first coronavirus peak earlier this year.
The earnings report overall suggested this global restaurant operator is managing in what has been a tough 2020. But there were some interesting details in the report that some investors might have missed. Here are three takeaways from Restaurant Brands' latest earnings report.
The Popeyes chicken sandwich is a big winner. Image Source: Restaurant Brands International.
1. Digital and drive-thru were revenue drivers
Drive-thru and delivery have continued to perform well in the third quarter. CEO Jose Cil noted on the earnings call, "After a strong performance in Q2, comparable drive-thru sales were again up in the double digits from last year across brands in the U.S. and Canada, while total delivery sales were up well into the triple digits across our systems."
The restaurant-chain operator is continuing to invest in its off-premise business, with upgraded technology in outdoor digital menu boards at more than 10,000 drive-thrus in the U.S. and Canada. Much of these upgrades are expected to be in place by the end of 2021. These menu boards will also allow contactless payment and faster service through drive-thru lanes.
Increasing digital registration in Restaurant Brands' rewards programs is part of its growth strategy, using personalized offers and rewards to drive traffic and revenue. Chief operating officer Joshua Kobza spoke about the effectiveness of tailored offers: "These offers have had an increasingly positive impact and added approximately 1% to our comparable sales for the third quarter."
2. Popeyes continues to be a top performer
Third-quarter revenue at Popeyes increased by more than 21% to $1.33 billion. U.S. revenue was very strong, with comps growth of nearly 20% year over year. Notably, this impressive growth was achieved against the year-ago quarter's 10% comps growth, driven by strength across all categories.
Popeyes' very popular chicken sandwich is drawing in customers. Cil commented that "millions of people have been coming back for the chicken sandwich, but it's been really exciting to still see a significant number of first-time purchasers in Q3." The chicken sandwich was the largest driver of revenue growth during the third quarter.
Restaurant Brands plans to turn Popeyes into a mainstream brand globally. Net unit growth in the third quarter was up 7%, on top of the 5.5% in the same period last year, indicating Popeyes' momentum. Cil was confident about the brand's expansion plans on the latest earnings call. "We've generated a very healthy level of sales and profitability at the stores we've opened to date," he said, "and we believe there's considerable wide space all over the globe that will fuel growth for years to come."
3. Restaurant Brands' growth will be boosted by upgrades in its store base and menu items
The company is positioning itself for long-term revenue growth by optimizing its stable of brands. It will close underperforming restaurants (those generating about 30% lower-than-average revenue in their region) while opening updated outlets in better locations. Cil said on the earnings call: "We expect the closures will have a relatively small near-term impact on our store count and an even smaller impact on systemwide sales. We expect the replacements will drive a meaningful top-line uplift and benefit to franchisee profitability, and support attractive returns for both our partners and for us over a multiyear period."
The restaurant operator is planning additional efforts to meet consumer tastes and help revenue growth, including offering healthier options. For instance, it's improved its flagship product from Burger King, the Whopper, making it free of artificial colors and preservatives.
In the current economic uncertainty, consumers are gravitating toward value. Restaurants Brands' fast-food franchises already sell many value-priced items, but the company is planning limited-time offers to boost foot traffic. These efforts include $1 nuggets deals and a $5 Scare Box with two Whopper Jr. sandwiches, two small fries, and two small soft drinks.
The takeaway
Overall, Restaurant Brands is well-positioned in the current environment with popular franchises and value-priced offerings. As people continue to gravitate toward low-contact, take-out dining options, its chains will benefit. The consumer discretionary company is also investing in digital and in its store fleet, boosting future growth.
