2013 was a tough year for the restaurant industry with headwinds that affected Burger King Worldwide (NYSE:BKW.DL) and McDonald's (NYSE:MCD). As both companies closed out the year, Burger King ended on a high note and McDonald's ended on a low note, especially in the U.S.
Various clues suggest that while McDonald's is struggling to get its groove back, Burger King has already done this -- and the company is set for a fantastic 2014.
The royal results
Burger King reported fiscal fourth-quarter results on Feb. 13. Total revenue is not meaningful as the company refranchised a large number of restaurants which means lower revenue royalties and potentially higher profits. Wouldn't you think that the "King" would have always gone with a royalty-based business model?
Anyway, Global same-store sales jumped 5.7% (in constant currency). Same-store sales inched up 0.3% in the U.S. and Canada. While that doesn't sound like much, it reversed from a 0.3% decline in the quarter just prior.
This compares to results from McDonald's which saw a 0.7% increase in the third quarter turn into a 1.4% decline in the fourth quarter. While Burger King saw a net 0.6% improvement in domestic same-store sales, McDonald's saw a 2.1% net drop. Using the McDonald's benchmark, Burger King improved by 2.7%.
In the end, Burger King's adjusted diluted earnings per share tacked on 4.4% to $0.24.
Bulking up with Satisfries, Big Kings, and $1 BBQ sandwiches
Thanks to new menu items, Burger King saw an improvement in same-store sales sequentially in every quarter in 2013. The company credits its success and expectations of continued growth to its focus on "launching fewer, more impactful products," unlike McDonald's which has seemed guilty of more of a shotgun approach.
Burger King saw successful sales and traffic increases from its Satisfries, Big King, and $1 BBQ sandwich introductions.
Burger King has been reimaging its restaurants, which tends to result in a 10% to 15% boost in sales for each one, and it is aggressively expanding its store count all over the world. This is especially true in France and India where it believes the market is wide open. All of this expansion is coming from Burger King's franchisees so the main corporation can focus more on new menu introductions that bring extra traffic in the doors and make guests come back again for more.
Sticking to home cooking
Almost equally as important as its introductions of new items is the ease at which the company is able to do so. McDonald's and its Mighty Wings, for example, were something completely unrelated to the rest of its menu. In contrast, Burger King CEO Daniel Swartz points out that his company introduces "operationally simple products for our franchisees."
He cites the Big King sandwich as an example that is "not only driving sales and traffic, but it adds minimal operational complexity in our kitchen."
Swartz believes there is ample opportunity to expand the brand at current restaurants and vast wide open markets to expand the brand in new ones. He gave as an example that guests are going out of their way in some countries to stop at Burger King at train stations rather than just going in because the location happens to be at a stop.
Burger King grew its worldwide store count by 5% last year. Swartz points out that this growth made the company one of the leaders in terms of expansion in the quick service industry.
The burger wars have taken a new turn
The burger wars have been going on for decades with Burger King trailing far behind McDonald's, but this time may finally be different.
McDonald's still has a market cap more than 10 times higher than that of Burger King so the company doesn't have to surpass McDonald's in order to reward shareholders, rather it just has to make more meaningful market share gains. It appears to be doing that despite the struggling economy.
Investors should look for Burger King to really shine when the economy picks up which makes for a long-term compelling idea. Watch for more creative menu introductions to further drive sales and profits for Burger King.