Despite facing intense competition and a tough economic environment, US restaurant chains Burger King Worldwide (UNKNOWN:BKW.DL), Wendy's (NASDAQ:WEN), and Chipotle Mexican Grill (NYSE:CMG) remained some of the most valuable buys in the restaurant industry during the last 12 months.
In this article, I will analyze why investors are betting on Burger King and examine what's in store for the restaurant chain in the future.
What drove Burger King's profits?
On April 25, Burger King announced its first-quarter earnings. The company posted earnings of $0.17 a share, up 69% from $0.10 a share a year earlier. However, revenue slipped 26% to $240.9 million. Excluding the impact of currency fluctuations and refranchising, total revenue grew by 6.9%. Same-store sales were up by 2%, including an increase of 0.1% in Canada and the U.S.
One of the major reasons for this remarkable earnings growth was a sharp decline in the company's expenses. The restaurant's expenses dropped by a staggering 86% to $15.5 million during the quarter. Last year, Burger King refranchised a net of 360 restaurants, which is why it's continuously incurring lower expenses.
More recently, Burger King's new food items such as Satisfries and the "Burger King" burger have done really well. With Satisfries doing a great job, the fast-food chain has replaced the standard fries with Satisfries in its popular Kid's Meal. Satisfries have 40% less fat and 30% fewer calories than standard fries.
In the last year, Burger King opened 670 net new restaurants around the world. In North America, the company continued reimaging and remodeling its existing restaurants. Burger King remodeled around 600 stores last year, or 30% of its 7,400 locations in the U.S. and Canada. By year-end 2015, the fast-food chain has a goal of remodeling 40% of its restaurants in the region.
In such a competitive market where consumers have so many restaurants to choose from, brand image plays a vital role. Alex Macedo, president of Burger King's North American business, said:
We recognize that when our guests drive down the street today, they have many dining options. In a competitive market, having a fresh new image is one of the main ways we can differentiate ourselves.
While Burger King is enjoying success from its international operations, it continues to expand its restaurant portfolio worldwide. It recently opened its first restaurant in the Kingdom of Brunei where it chose Sinofood Express as its franchisee. Apart from this, Burger King and ADM Food Services have collaborated to establish three Burger King restaurants in Martinique. The restaurants will be opened in Le Lamentin, Fort-de-France, and Guadeloupe.
Recently, Burger King partnered with AT&T to launch AT&T Wi-Fi services for its U.S. restaurants. The new platform, "WHOPPER Wi-Fi," which is easier to use and has enhanced connectivity, will replace the company's old Wi-Fi system. Numerous customers use the Internet while dinning at Burger King restaurants, and the new service will help in improving the overall customer experience at the fast-food chain.
Wendy's and Chipotle Mexican Grill
In March, Wendy's completed its system optimization initiative by selling 104 restaurants in four U.S. markets -- Phoenix, Los Angeles/Palm Springs, Hawaii, and Albuquerque, N.M. The system optimization initiative, which started last July, targets a transition into a franchise-based model. Its goal is to reduce the total system ownership from 22% to 15%. Under the initiative, Wendy's sold 418 company-operated restaurants in the U.S. The program also involves expansion plans, shutting underperforming stores, and reimaging its restaurants. Wendy's year-over-year capital appreciation stands at 46%.
After missing Wall Street's expectations in the first quarter, Chipotle's share price fell by more than 6% in after-hours trading. However, the company's earnings grew 8.5% from the comparable quarter of last year, as it reported earnings per share of $2.64. The company plans to open 180-195 new restaurants this year. It has also said that it will raise its prices by 3% to 5% in the coming weeks. Chipotle has given a year-over-year return of 38% to its investors.
Burger King's strategy of refranchising continues to pay off for the company. By reducing its expenses substantially, the fast-food chain is posting heavy profits. The company's new items, especially Satisfries, have also contributed to these profits, as they have enjoyed success of late. After doing pretty well in international markets, the company is expanding its brand, which will give a further impetus to its earnings in the coming years.
As the restaurant industry is inundated with many food companies, Burger King's decision to reimage its North American restaurants will prove to be a wise one. Given the fact that many customers these days use their smartphones and tablets to log on to the Internet, an improved Wi-Fi service will give Burger King a further edge over its competitors.
Burger King will continue to post incremental earnings in the coming days, largely due to its refranchising strategy. In short, buy Burger King.