Burger King’s sales fall in 4th Q, signaling more pressure for QSRs

Burger King’s sales fall in 4th Q, signaling more pressure for QSRs

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’s [3] latest quarter had analysts and investors discussing the future prospects of quick-service concepts amid the harsh environment of rising unemployment, slowed consumer spending and deep menu price discounting. —A sales slip in

(To view charts featured in this week's pages, click here.) [4] —A sales slip in

Many observers predicted that Burger King’s sales hit bottom in May and would improve from here on out. Officials at BK parent company Burger King Holdings Inc. did not offer guidance on the year ahead but acknowledged sales-driving efforts would be challenged by the economy. The chain plans to focus its efforts on $1 items, coupons and, in early 2010, more premium products like the XT Steakhouse burger. —A sales slip in

“We will flex premium when we can; we will flex value when we need to,” said Burger King chairman and chief executive John Chidsey during a corporate conference call with investors Aug. 25. —A sales slip in

Revenue for Burger King’s June 30-ended fourth quarter fell 2 percent to $629.9 million. Same-store sales fell 2.4 percent globally and 4.5 percent at locations in the United States and Canada. That was the first negative same-store sales result in the United States since 2004. Despite the sales slip, BK posted a 16.4-percent increase in net income, as it was able to improve margins, especially at its U.S. restaurants, book refranchising gains and benefit from a reduced tax rate. —A sales slip in

Burger King’s fourth-quarter profit totaled $58.9 million, or 43 cents per share, compared with a profit of $50.6 million, or 37 cents per share, in the same quarter a year earlier. —A sales slip in

Jeff Omohundro Wells Fargo Securities LLC —A sales slip in

Omohundro said Burger King’s latest marketing shift toward value, with the $1 Whopper Jr. sandwich and local promotions that include two Whoppers for $3.50, or $3 chicken sandwiches, would help spark more guest traffic. —A sales slip in

“May might have been the bottom in terms of sales and traffic,” he said. “We think an upcoming national coupon drop could benefit traffic as well as marketing plans around NASCAR in September and $1 sandwiches in October, but competitive and macro pressures persist.” —A sales slip in

Omohundro expects same-store sales trends to remain negative in the United States and Canada through the first half of Burger King’s fiscal 2010, which started in July, and to become positive in the second half of the fiscal year. —A sales slip in

John Glass Morgan Stanley & Co. —A sales slip in

Glass said Burger King’s outlook, especially for top-line growth, is hazy. After the brand successfully drove traffic with the introduction of new products like the Burger Shots and heavy advertising, the latest-quarter sales trends were not positive. —A sales slip in

“While the causes of the deceleration are not easy to pinpoint,” Glass said, “it may be due to lack of incremental sales drivers to layer on, increased competitive discounting and macroeconomic factors.” —A sales slip in

He predicted a slow sales environment until the second half of Burger King’s fiscal year, when the chain will begin to push more premium products made available through the new batch broiler platform expected to be in all U.S. stores by February. Glass said the items, including larger burgers and ribs, could help average-check growth. —A sales slip in

David Tarantino Robert W. Baird & Co. —A sales slip in

Despite the challenging sales landscape for Burger King, Tarantino noted that the company has focused on favorable cost-cutting moves to help drive earnings growth. —A sales slip in

“We think the potentially favorable commodity outlook, solid cost controls, lower restaurant operating expenses and lower interest expense driven by debt pay-down could support earnings in 2010,” Tarantino said. —A sales slip in

He estimated a year-to-year change of more than 100 basis points in company restaurant margins by the end of fiscal 2010, which would be the first uptick since the first quarter of the company’s fiscal 2008. —A sales slip in

Steve West Stifel, Nicolaus & Co. —A sales slip in

West noted that Burger King’s outlook is brighter than may be anticipated, helped by a reduction in operating costs and the chain’s remodeling efforts, which already have started to pay dividends. He said there is room for growth when it comes to Burger King’s average unit volumes, which totaled about $1.3 million, and lag segment leader McDonald’s, which boasts an average annual unit volume of $2.2 million. New or remodeled stores with higher sales levels will help Burger King narrow that gap. —A sales slip in

“The remodeling and rebuilding of older restaurants were margin-neutral for the quarter, as the completed units provide an approximate 15-percent-to-30-percent boost to sales, which essentially funds the program moving forward,” West said. “We are strong believers in this program and the longer-term merits, as one need only look at McDonald’s (and even Sonic and Jack in the Box) success the past few years, which is highly attributable to this same type of remodeling program.” —A sales slip in

Burger King set a two-year goal to reach an average unit volume of $1.5 million, which West said it could reach earlier than expected.— [email protected] [5] —A sales slip in