Restaurant Brands International (QSR 0.08%) owns the Burger King, Popeyes, and Tim Horton's chains. These days, however, it's the chicken-joint's chicken sandwich grabbing all the headlines, and that's both a blessing and a curse.
Let's take a closer look at whether investors should be interested in biting into this restaurant-operator's stock or if they're likely to be plucked clean by buying.
Image source: Getty Images.
Ruling the roost
Popeyes has been a wonder for Restaurant Brands International. It introduced its crispy chicken sandwich last year, and ever since then, that's just about all anyone can talk about regarding the company. Even before the coronavirus pandemic, consumers were lining up around the block to buy one of the sandwiches, which quickly became a cultural phenomenon and still has people clamoring for more.
The restaurant chain reported an eye-popping 20% jump in same-store sales, while most other restaurants, including Burger King and Tim Horton's, were seeing comps fall. And that came after Popeyes saw a 25% gain in the second quarter during the grip of the worst part of the COVID-19 outbreak.
Consumers have indicated that, healthcare crisis or not, they're willing to stand six feet apart for as long as necessary to get a chicken sandwich. And that's the problem: Popeyes is tasked with carrying the entire weight of Restaurant Brands' performance, while Burger King and Tim Horton's lag.
An anchor to performance
Tim Horton's is a troubled chain. Comps fell 12.5% globally last quarter and were down 14% in its home market of Canada. That's better than the 29% plunge comps took in the second quarter but indicates deeper issues with the business, as the chain hasn't posted a single quarter of positive comps in over a year.
Restaurant Brands plans on closing underperforming restaurants, altering its menus, and bringing on new staff to change the direction in which the chain is heading. Still, there's no guarantee these tweaks will work, and Canada has been much more restrictive in its response to COVID-19 than the U.S.
As a coffee-forward chain, Tim Horton's felt the impact of the decline in the morning commute to work. It found an 80% decline in Canadian transit activity in March and April, and said it was still down by 50% during the summer. (CEO Jose Cil said there has been some incremental improvement in the past couple of months.) But as the country experienced a rise in coronavirus cases, it went back into strict lockdown mode, and that's hurting Tim Horton's business.
Driving through change
Burger King has also encountered problems that have required significant financial investments to combat, such as introducing digital signage at its drive-thru windows and revamping the menu. Between Tim Horton's and Burger King, the restaurant operator expects to install about 40,000 screens at over 10,000 drive-thrus in the U.S. and Canada.
Restaurant Brands has broadly rolled out delivery services in the U.S. so that 6,200 Burger King restaurants, or over 90% of the total, have it available. It's also making a effort to remove artificial colors and ingredients from its signature Whopper sandwich.
Recognizing there's a problem and acting on it are important steps to take, and the market has basically kept Restaurant Brands International in a holding pattern. The stock of the restaurant operator has largely traded in a narrow band on either side of $55 a share since June.
However, hedge-fund operator Bill Ackmann of Pershing Square Capital seems to think the company will be successful in its turnaround efforts, as he dumped all of his holdings in Berkshire Hathaway and significantly added to his position in Restaurant Brands International.
A go-slow approach
Retail investors might want to be more circumspect. There's a new wave of lockdowns coming, and while the investments Restaurant Brands has made in drive-thru, digital, and delivery will help, there needs to be more proof the changes it's making will actually take root with consumers.
Moreover, while Popeyes is still posting big jumps in comps, the rate of growth is declining and will now be lapping some of the biggest sales surges it registered following the introduction of the chicken sandwich.
A repeat performance may be difficult to produce anytime soon, making it even harder to recommend Restaurant Brands International at its current elevated valuation.
