Analysts question QSR stability as BK’s traffic gains level off

Analysts question QSR stability as BK’s traffic gains level off

Editor’s note: Analyze This is a quarterly look at a publicly traded restaurant company that has sparked discussion, for better or worse, among securities analysts. The comments do not necessarily reflect the views of Nation’s Restaurant News, nor should any statement be construed as a recommendation to buy or sell any security.

MIAMI Burger King [3] Holdings Inc. said this month that guest traffic and margin improvements had eroded in March, negatively impacting its third-quarter sales and earnings. —

Investors reacted strongly to the news, and some observers questioned whether the results reflected a slowdown in the sales boon many fast feeders have registered as consumers trade down to quick service during the recession. —

(To view charts featured in this week's issue, click here.) [4]

The parent company to the No. 2 burger chain said it expected revenue for the March 31-ended third quarter to total $600 million, up about 1 percent from $594 million in the same quarter last year, but short of the $625 million in revenue that analysts had expected, on average, according to Thomson Financial. —

Burger King said it expected third-quarter earnings to total between 33 cents and 35 cents a share, which would meet analyst targets. A year ago, the company earned 30 cents per share. Full quarterly results are expected April 29. —

Wall Street did not take kindly to Burger King’s news, and the company’s stock fell 17.7 percent to close at $18.67 on April 15. The stock has traded between $16.56 and $30.95 per share during the past 52 weeks. —

Until this month, Burger King had guided toward continued positive sales traction, especially with new menu items like its Burger Shots and new advertising for its Angry Whopper sandwich. Quick-service chains, especially segment leader McDonald’s [5], have been industry sales leaders through the roughest parts of the recession. Most recently, however, chains including Sonic, Arby’s and Popeyes have reported negative same-store sales. —

At Burger King, same-store sales in the United States and Canada rose 1.6 percent for the quarter. Systemwide same-store sales rose 1 percent. Margins in Germany and Mexico were particularly weak on lower traffic numbers, the company said. Analysts noted that the quarterly result for North America most likely included negative traffic trends of between 1.5 percent and 2 percent in March, following positive numbers in January and February. —

Miami-based Burger King has more than 11,800 restaurants worldwide. —

John Ivankoe J.P. Morgan Securities Inc.

Ivankoe noted that the market’s reaction to Burger King’s announcement was justified. —

“All indications pointed to solid sales trends for the quarter, especially in the U.S., with further enthusiasm around easy remodel-related margin comparisons to drive substantial U.S. store-level margin gains,” he said in a note. —

He reduced price targets for the company and said lower same-store sales trends may persist through the first half of Burger King’s July-beginning fiscal 2010. Ivankoe added that officials at J.P.Morgan nonetheless remained believers in the Burger King story for the longer term. —

David E. Tarantino Robert W. Baird & Co.

Looking ahead, Tarantino noted that Burger King had indicated an improved sales picture for April, especially in the weaker overseas markets. The chain implemented lower-priced promotions and increased hours of operation in Germany and Mexico, especially in the early morning hours to spark breakfast sales. —

Still, he noted that sales trends could remain difficult for quick-service chains. —

“Looking ahead, we expect domestic traffic for limited-service restaurants, on average, to remain under pressure due to macro factors,” he noted, “although our model is calling for slightly less negative trends, versus recent lows, to emerge as 2009 progresses.” —

Nicole Miller Regan Piper Jaffray & Co.

Miller Regan remained positive on Burger King, as the chain is expected to benefit from restaurant remodels, new product introductions and new advertising campaigns. —

“We continue to expect consumers to gravitate toward affordability, i.e. value proposition, versus aspirational dining experiences,” Miller Regan said. —

She said Burger King’s stock was one of the best positioned compared with other restaurant industry stocks. —

John Glass Morgan Stanley & Co.

Glass said in a note that increased competitive discounting by McDonald’s and higher U.S. unemployment figures could have hurt Burger King’s March sales. He also noted that the stock’s reaction was more about miscommunication than results. —

“While the sales shortfall itself was not that large, [the company’s] pre-announcement is in contrast to the upbeat views offered by management several times during the quarter,” he said. “This is not the first quarter there has been a communication misstep between Burger King and the Street.” —

He added that continued increases in unemployment, as well as recent commentary from McDonald’s and Wendy’s, point to a downtrending sales picture. —

“More broadly, results suggest that the days of all three burger [quick-service chains] prospering simultaneously are likely over,” he said. —