The perfect couples movie? Deadpool has been the talk of critics and fans alike after embracing its R-rating to sell out theaters all over the country during the Valentine's Day weekend.
In this week's edition of Consumer Goods Industry Focus, Sean O'Reilly and Vincent Shen break down the box office performance of Deadpool and what the film's success could mean for Twenty-First Century Fox(NASDAQ:FOXA) (NASDAQ:FOX)going forward. Then, the team covers the juiciest bits from Restaurant Brands International's(NYSE:QSR)fourth quarter 2015 earnings release and the renewed momentum traditional fast food companies are enjoying.
A full transcript follows the video.
This podcast was recorded on Feb. 16, 2016.
Sean O'Reilly: We're talking about Deadpool's box office success and big profits at Burger King, on this consumer goods edition of Industry Focus.
Greetings, Fools. Sean O'Reilly here from Fool headquarters in Alexandria, Va. It is Tuesday, Feb. 16, 2016, and joining to talk about all things consumer goods is the one, the only, Mr. Vincent Shen. What's up, dude?
Vincent Shen: Hi, Sean. How's it going, man?
O'Reilly: Good. I'm doing really well after you and I went to see Deadpool yesterday.
Shen: Yes, we did.
O'Reilly: We went up to Chinatown in the nation's capital and went to the Regal Cinema, and your fiancee and her friends were nice enough to join us, and, wow, it was a really good movie.
Shen: You liked it?
Shen: I liked it, too. It was fun.
O'Reilly: I mean, it's rated R; it's super crude. My mom was asking about it because everybody's raving about it on the morning news over the weekend, like everybody's raving about it, and my mom's like, "What's this Deadpool?" And I'm like, "Under no circumstances are you to go see this movie."
Shen: Yeah, might be pushing it. I don't know how my mom would receive the film.
O'Reilly: This is The Motley Fool, so of course we're talking about investing and stock market and everything, so, what were the financial ramifications of the success of this movie?
Shen: Yeah, so, the film has done incredibly well. The buzz around it, the general critical reception, has allowed it to break quite a few records for its category.
O'Reilly: The marketing alone was genius.
O'Reilly: They had those funny billboards, they made it like a rom-com. I mean, all of it was just -- anyway.
Shen: Yes, so, domestically they're estimating that it generated about $150 million in ticket sales, foreign box office receipts about $130.
O'Reilly: Right, these are huge numbers for --
Shen: Total take from the long and double holiday weekend, which I'm sure benefited them, was a little over $280 million, and this is on a $58 million budget, approximately, which doesn't include all of the marketing costs, which were probably extensive for this film, but just, you know --
O'Reilly: But even if that doubled it, just let's pretend they spent $120.
Shen: Overall, this is still an extremely relatively modest budget, not only for a major studio production, but for one of these superhero productions in particular, these generally have, you know, usually cost over $100 million to produce.
O'Reilly: Right. What popped into my mind when you showed me this earlier was, if memory serves, I think The Dark Knight, which, the buzz around that was huge back in 2007-2008 or whatever -- I think that made, I mean, if it made over $180 million it wasn't much more on opening weekend; it was probably $220 or something, and that's for a PG-13 movie. This was a very, very, very rated-R film, and it made this much money.
Shen: The movie did incredibly well, and they actually now claim the No. 1 spot for several categories, best rated-R opening weekend of all time, best February opening weekend of all time. Those same records apply for all IMAX theaters as well, and it's actually the biggest opening for the studio that produced it, 20th Century Fox, which we will get to and what that means for their parent company. But another interesting fact is the director's name is Tim Miller; this was actually his first major film production. His previous credits include some short films, some visual-effects work on popular video games, but again, this is the biggest new director opening weekend as well.
O'Reilly: Having seen the film, I have to think that the visual effects that the director had some experience with came in handy.
Shen: Exactly, and some of the international markets did very well for Fox, including Australia, Taiwan, Brazil, Hong Kong, again all their biggest openings for that studio, and in the end, the high ratings, positive buzz from the audiences to drive a lot of momentum for the movie, it's not coming up against, like, huge releases in the next week, so it's very likely built enough on that momentum to probably claim the No. 1 spot again for next weekend. An interesting note, actually, was for this past weekend was the first one that Star Wars: The Force Awakens had dropped out of the top five.
O'Reilly: The force was strong with Deadpool.
Shen: Since that movie came out in mid-December, this is the first weekend, now we're in mid-February, that it's dropped out of the top five for the weekend, so it looks like the run for that movie's officially starting to wind down, really.
O'Reilly: That's actually kind of ironic, because if memory serves, 20th Century Fox used to own and produce the Star Wars films.
Shen: Yes, the prequels, exactly.
O'Reilly: Yeah, anyway, so what does this mean for 20th Century? Their stock's up, isn't it? This is good stuff.
Shen: The studio's banking on some of these superhero films to continue driving the results for their film entertainment segment at 21st Century Fox, and that's the second largest business for them. It makes up about one-third of their top line, and just to give you some perspective, for the film entertainment segment, five out of their top 10 opening weekends have been from Marvel titles. Deadpool is now No. 1; the other four are the X-Men movies.
Shen: Two of the others that you mentioned were actually the Star Wars titles, too, the prequels. They definitely depend on those proven franchises, and the thing is, they also have a lot of great movies on tap. The studio has more Marvel coming with X-Men Apocalypse, very, very highly anticipated.
O'Reilly: Yeah, which, we saw a preview for that in Deadpool, so.
Shen: They also have the standalone Gambit origin story probably coming out later this year, and they also have the long, long awaited sequel with Independence Day: Resurgence.
O'Reilly: That movie, do you realize how much money the original Independence Day made?
Shen: Yeah, it was actually, coincidentally, one of Fox's highest-grossing films of all time, and they also have Assassin's Creed, and that's based on --
O'Reilly: Oh, that's the video game.
Shen: Yeah, huge video game franchise that has sold over 80 million total copies in its run, because they have had, I think, like nine installments of the game at this point.
O'Reilly: Oh my gosh.
Shen: So that's also has a lot of fans excited and hopefully could be a big blockbuster for them, but with all that said, you know, they have this really strong slate of movies lined up; the thing is, as is always the case with, you know, a Hollywood-based business like this, it can be really hard sometimes to call how successful these movies are. You know, they had a huge flop last year with Fantastic Four, same studio. It can be really choppy, can swing high or low, with unexpected hits like this one, with Deadpool, and disappointments like Fantastic Four, you think the whole superhero thing is pretty proven at this point, but they still have their flops as well. At the same time, I think management showed a lot of, they seemed to prove that they understood their audience with this movie. They marketed it brilliantly.
Shen: The buzz in terms of social media and all these other places just really added to the success for the movie over the weekend, so hopefully it's something they keep in mind and can leverage going forward. In terms of their other segments, just for the company and the rest of the businesses at 21st Century Fox, you know, they have the presidential election, which should really help their television cable network programming for the remainder of the fiscal 2016 and at least half of fiscal 2017, especially some of them on the news with this potential nomination coming up for the Supreme Court justice, just, I think a lot of people are going to be glued, obviously, to some of Fox's networks.
O'Reilly: It's a good time to be Rupert Murdoch.
Shen: Yes, and another thing is we're noticing from a lot of other content providers -- think Disney as well, for example -- is you know they're seeing higher programming costs for their networks, and a lot of that's being driven by sports. Fox specifically mentioned soccer, Major League Baseball, college football rights having increasing costs contributing to that, or contributing to higher programming costs for that segment, and that's something we're seeing across the board. Live sports have this very obvious understanding that they are the hold for a lot of these cord-cutters and things like that, so they can charge these premium prices.
Otherwise, the stock overall is actually down about 30% since the end of 2014. I think management's really focused on returning capital to shareholders, too, so they authorized $5 billion of share repurchases last summer. They expect to use up that authorization by August 2016, and in the past five years, they've reduced their shares outstanding about 25%, so pretty significant. You know, 2015, they bought back about $6 billion worth of shares, the year before that almost $4 billion. They're very focused; the company's definitely very focused on that. I'm interested to see ... it might only be the second segment in terms of film entertainment, but just always nice to have fun, fan-favorite kind of movies coming out like this.
O'Reilly: For sure. OK, before we move on I wanted to point our listeners to the newly redesigned focus.fool.com. There you can take advantage of a discount on the Motley Fool Stock Advisor newsletter that works out to $129 for a full two-year subscription. Once again that is focus.fool.com.
So, Vince, we're moving on here to kind of a follow-up story to a show we did, I don't know, three, four months ago, something.
Shen: Yeah, some time ago.
O'Reilly: Basically it's a follow-up to 3G Capital, the private-equity buyout-type firm, and all the restaurant brands they snapped up, which in this case is Burger King and the profits and the success that they've had with this so far.
O'Reilly: They've just reported earnings for their Tim Hortons/Burger King brands. How are things looking?
Shen: Sure, so Restaurant Brands International for full year 2015, just, I think, was really impressive to see. Tim Hortons enjoyed comparable-store-sales growth of about 5.6%; Burger King logged 5.4% growth. This is in --
O'Reilly: These are almost Chipotle-ish numbers from back in the day.
Shen: Pretty impressive for both of those brands, and also, they opened 155 and 631 new locations, that's respectively for Tim Hortons and Burger King --
O'Reilly: Did you -- if you didn't catch this, that's fine -- is that mostly Tim Hortons or is that mostly Burger King?
Shen: No that was 630 was for Burger King. They have a much bigger network.
O'Reilly: Oh, wow, OK.
Shen: Their total store base increased about 4.2% during the year. Both businesses saw a lot of successful promotions and new products coming out, and they also were pretty aggressive in terms of their overseas development in markets like the Middle East and Europe. The stock, investors are really excited; it's trading up, I think, about 5% when I checked in early morning trading. The main theme I wanted to bring up is how those results compare to some of the other big fast food burger chains. McDonald's also reported earnings recently. They saw their comps go up about 1.5% in 2015.
But the thing is, momentum really picked up for them during the fourth quarter, when comps were up 5.7% in the U.S. because of the launch of all-day breakfast. They're seeing some really nice momentum there from that promotion, and it seems like that was a big success that helped turn McDonald's around when, honestly, it wasn't that long ago when people were thinking about writing the obituary for that company. Know what I'm saying?
O'Reilly: On that note, with just the rollout of certain products in order to draw in customers, talk to me about hot dogs and Burger King.
Shen: Yes, so, interestingly, Burger King announced that they would actually start serving hot dogs as part of their regular menu, consistent menu offering, not like some special promotion, and so they've been testing this for about 18 months in markets like Salt Lake City, Memphis, Baltimore, Detroit, and Kansas City. So the hot dogs are launching on Feb. 23, and because Burger King has, I think, over 7,000 locations in the U.S., they're going to become the largest chain to offer hot dogs as part of their regular menu.
Shen: There's a tie-up here with who you mentioned earlier, 3G Capital, because 3G Capital, obviously, they brought together Burger King and Tim Hortons at the end of, I think it was 2014, it was a big, like, $11, $12 billion deal, so obviously, you know, we talked about 3G Capital again a few months ago, maybe half a year ago, in the big Kraft-Heinz mash-up --
O'Reilly: And of course Burger King has Heinz ketchup everywhere, so, anyway.
Shen: Exactly. As if that's not already part of it, Kraft Heinz also owns Oscar Mayer, which is working with Burger King to offer up these hot dogs.
O'Reilly: Oh my gosh.
Shen: It's kind of a funny thing where 3G Capital obviously leveraging the companies in their portfolio.
O'Reilly: The incestuousness of this little arrangement is ...
Shen: The strong results that we're seeing from Burger King, from McDonald's, also goes to Wendy's, who I tend to think of as the No. 3 player in terms of traditional fast food, or for burgers at least. They're seeing restaurant sales up 3.3% for 2015, and all of them seem to enjoy accelerating comps during the fourth quarter. Some of them attributed that to their promotions, but also the really warm weather during the winter maybe helped keep store traffic up.
And overall I just wanted to bring this up because a lot of people tout the fact that these higher-quality, better ingredients, fast casual chains are going to be the way of the future, going to start replacing a lot of the traditional fast food players. But the fact of the matter is, these companies and their management teams seem to be adapting very well and offering very value-minded promotions like the 2-for-$5, or the 4-for-$4 deal that these companies are competing with, and it's resonating with people. Whether it's breakfast or hot dogs, we'll see how well that works ...
O'Reilly: You want to go get one? I kind of want to go get one now.
Shen: ... these companies are far, far from being on their death beds, so to speak.
O'Reilly: Cool. Well, thank you for your thoughts, Vince!
Shen: Thanks, Sean.
O'Reilly: If you're a loyal listener and have questions or comments we would love to hear from you. Just email us at email@example.com. Again, that's firstname.lastname@example.org. As always, people in this program may have interest in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything based solely on what you hear on this program. For Vincent Shen, I'm Sean O'Reilly. Thanks for listening, and Fool on!
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