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Instant Analysis: Burger King Sees Potential to Add Thousands of New U.S. Restaurants

By Jeremy Bowman – Mar 16, 2016 at 5:56PM

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After a successful turnaround, the fast-food chain sees expanding domestically as an avenue to success.

What happened?
Burger King is back. The better-known half of Restaurant Brands International (QSR 0.23%), which also owns Tim Horton's, has delivered steady growth and increasing profits, and after a years-long turnaround is looking stronger than ever.

While McDonald's (MCD) and other rivals chased after higher-end fast-casual customers, with new products like kale salad, Burger King has been content to cater to its base. The successful launch of hot dogs last month, a rarity in fast food these days, and its new 5 for $4 menu show it's avoiding the missteps that some of its social-climbing rivals have been making.

After comparable sales growth of 5.7% last year and a 68% jump in EBITDA over the last five years, Burger King appears ready to make another bet on itself by adding new domestic stores. The number of Burger Kings in the U.S. has remained at roughly 7,100, but a company executive recently told The Wall Street Journal that he sees an opportunity to add thousands of new Burger Kings in the next five years in the U.S.

Does it matter?
At a time when rivals like McDonald's and Wendy's have been expanding slowly -- McDonald's actually closed more stores than it opened last year -- adding thousands of locations would be a bold bet. With 100% of its restaurants franchised, Burger King's model works in its favor as it tries to expand. If it can make the sale to franchisees to add new stores or recruit new operating partners, the company will make money through rent and royalties even if the new locations underperform.

Despite Burger King's recent comeback, the company's average unit volume is only about $1.3 million, well below Wendy's at $1.6 million and McDonald's at $2.5 million, indicating that the chain may not be as appealing to franchise partners as others.

But momentum is in the company's favor after the strong growth last year, and strategic choices to stop tinkering with the menu so much. The company jettisoned the low-calorie Satisfries due to weak sales and has made smart bets on limited-time offers like the A1 Whopper, for example.

After years of no unit growth, adding thousands of Burger King restaurants would be difficult, but its franchise model should ensure increased profits for the parent, Restaurants Brands International. 3G Capital, which took over the company in 2010, has proven a wise steward of the brand, and its management team has righted the ship. While thousands of new restaurants may be difficult to achieve, Burger King's return to store growth should be celebrated by investors.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Restaurant Brands International Stock Quote
Restaurant Brands International
$66.43 (0.23%) $0.15
McDonald's Stock Quote
$273.40 (%)
The Wendy's Company Stock Quote
The Wendy's Company
$23.01 (1.41%) $0.32

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