When I get calls wrong, readers sometimes suggest I eat crow. In this case, maybe it should be beef.
Specifically, the beef I said was missing from the Burger King Worldwide Inc. story when it returned to the public markets in 2012. The thesis at the time: "Someone may suggest to you that buying Burger King shares gets you a piece of a top-flight fast food company. That, I submit to you, would be a Whopper."
Well, the shares have doubled in a little more than two years. The stock has benefited significantly from the excitement over this week's Tims deal, but the gains were already meaty before the announcement of the cross-border merger.
That's because investors have increasingly bought into the Burger King story of growing profits by expanding internationally and selling off restaurants to franchisees. And, to be fair, the company's results suggest the company has indeed begun a comeback.
Burger King still has a ways to go, however, as its sales underwhelm and its franchisees foot the bill for the company's big changes. So while I'll admit defeat in the short term, I'm still wary of Burger King's long-term prognosis – and I suggest Tim Hortons shareholders think carefully before accepting stock in the new company.
First, let's turn the clock back. In 2012, Burger King was best known for executive turnover, financial engineering and selling fewer hamburgers than it had before. As the company prepped for listing on the New York Stock Exchange, it badly trailed Wendy's and McDonald's in average sales per U.S. restaurant and had reported just four consecutive months of positive same-store sales growth in North America after woefully bad numbers in 2011. (Same-store sales, or revenue at locations open for at least one year, is a key retail and restaurant metric.)
To pump up cash flow, Burger King planned to sell its company-owned restaurants to franchisees and then have them pick up the bill for renovations running from $250,000 (U.S.) in the "low-cost" remodel to $525,000 for the "standard" plan.
How has all this worked? Not bad, as best we can tell. The company has shed its own restaurants and is essentially 99-per-cent franchised. Across the globe, Burger King added 131 restaurants, growing its count by 4.8 per cent. A small increase of 0.9 per cent in same-store sales, coupled with the increased store count, meant system-wide sales grew by 5 per cent. EBITDA, or earnings before interest, taxes, depreciation and amortization, increased by 12 per cent, and the company raised its quarterly dividend.
Like McDonald's and Yum Brands, owner of KFC, Taco Bell and Pizza Hut, the Burger King "buy" case requires overlooking declining performance at home while salivating over international prospects. The company reduced store count in the United States and Canada in the quarter, and its meagre 0.4-per-cent same-store sales number, while better than past negatives, isn't enough to keep domestic sales growing.
For a bit more insight into Burger King and its franchisees, we can look at Carrols Restaurant Group Inc., a Syracuse, N.Y.-based, NYSE-listed company that owns 560 Burger Kings – and that just posted its 10th money-losing quarter in a row.
Carrols says its same-store sales fell by 2 per cent in the second quarter, compared with 1.4 per cent the year before. The company blamed a cut in advertising support from Burger King corporate headquarters and reduced its sales and profit guidance for the remainder of the year. And yet it continues to buy Burger Kings and spend the money to remodel them. Its shares are up about 14 per cent since Burger King began trading, lagging the market.
As best we can tell, franchisees are happier than they were when a previous Burger King owner raked in royalties on an unprofitable $1 double cheeseburger. But ultimately, owning a Burger King restaurant has to be a profitable, rewarding venture. Right now, the franchisees are paying big bucks in hopes that better sales will follow. If it doesn't work out, owning Burger King stock will be similarly unappetizing.