| Despite 1st-Q sales drop, BK sees potential in cheeseburger promo
By SARAH
E.
LOCKYER
By RON
RUGGLESSMIAMI
(Nov.
09,
2009 )
—After upping the ante in the value wars, Burger King already is seeing positive results from its $1 double cheeseburger promotion introduced in mid-October.
Following a same-store sales slide of 4.6 percent in North America for the company’s September-ended first quarter, the No. 2 burger chain said it was cautiously optimistic about the promotion’s effect on sales trends. In addition, Burger King’s largest franchisee, Carrols Restaurant Group Inc., which operates more than 500 BK locations, said during the Wells Fargo Securities consumer conference last month that sales were strong and traffic trends had improved during the initial weeks of the promotion. (Click here to view charts featured in this week's print issue.) Although Burger King Holdings Inc. has so far commented only on first-quarter results, which were recorded prior to the debut of the $1 double cheeseburger, many analysts said they believed the promotion would help the now-struggling fast-food chain. “First-quarter U.S. traffic trends improved sequentially on a quarter-over-quarter basis, and we expect this to continue and even accelerate into the second quarter due to the company’s focus on value,” said Piper Jaffray restaurant analyst Nicole Miller Regan. The $1 double cheeseburger had caused tension throughout the Burger King system, as some franchisees reportedly resisted selling the item for $1 in order to protect their profit margins. The company announced in late September, however, that the product would be available as a limited-time offer in the United States beginning Oct. 19. The $1 double cheeseburger is now offered in about 25 percent of U.S. restaurants, the company said. Rival McDonald’s raised the price of its double cheeseburger from $1 to $1.19 late last year amid rising costs and franchisee complaints that a profit could not be made on the item. The double cheeseburger was replaced on the Dollar Menu with a McDouble sandwich, which contains two patties but only one slice of cheese. Some analysts noted that even though rising unemployment is eating into quick-service sales as fewer people commute to work or need quick meals on the go, a sharpened focus on steep value promotions will help drive traffic in the near term. The entire quick-service segment has been hit in recent quarters and many are looking to lower price points to spark consumer interest. McDonald’s is testing $1 breakfast items and Taco Bell is advertising an 89-cent taco. “The most recent deterioration in quick-service fundamentals has many investors appropriately questioning the ‘relative resilience’ of the category in a very challenging macroconsumer environment,” said Jeff Bernstein, restaurant securities analyst at Barclays Capital. “We believe near-term concerns around the broader category, and more specifically on Burger King, are overdone.” Bernstein noted that the $1 double cheeseburger promotion should help maintain guest traffic at Burger King in the short term and, with a projected long-term improvement in the economy, Burger King’s more premium-focused sandwiches will help increase the average ticket later in 2010. The chain has installed in about 60 percent of its restaurants worldwide a new broiler, which is expected to aid in the offering of new premium items, such as larger burgers and ribs. Burger King Holdings Inc. profit fell 6.4 percent. Net income totaled $46.6 million, or 34 cents per share, compared with $49.8 million, or 36 cents a share, in the same quarter last year. Latest-quarter revenue fell 5 percent to $636.9 million. Unfavorable currency exchange rates hit Burger King’s bottom line by 2 cents per share, the company said, and reduced revenue by $20.9 million. Global systemwide same-store sales fell 2.9 percent, reflecting a decline of 4.6 percent in the United States and Canada. “We are clearly not where we want to be as it relates to comparable sales and overall profitability,” John Chidsey, Burger King’s chairman and chief executive, said in a statement. He added that the company expected “the unpredictable consumer environment will persist in fiscal 2010.” The company cited The NPD Group’s recent study showing a traffic decline of 3 percent across the quick-service segment for the three months ended in August. McDonald’s earlier this month warned that it expected same-store sales would be flat to slightly down for the month of October. Burger King also said that high unemployment, now at 9.8 percent nationally, was affecting the No. 2 burger chain’s target demographic.—slockyer@nrn.com, rruggles@nrn.com  | Click Here to get more in-depth analysis.
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