Low, low, low…
In its last quarter, Burger King Worldwide Inc (NYSE:BKW)’s revenue declined while earnings rose by a huge percentage, mostly owing to cost cutting. The company managed to beat profit estimates. Comparable-store sales declined by 1.4%, leading to a 42.5% fall in revenue for the quarter. Adjusted net income was up a massive 51% in the quarter at $60.1 million. Diluted earnings per share rose 49% from the previous year to $0.17.
And why so?
What was the reason behind Burger King Worldwide Inc (NYSE:BKW)’s revenue decline? For starters, the company’s sales in the comparable year-ago quarter were particularly high, leading to an unfair comparison for its last quarter. Secondly, a stronger dollar in the last few months has affected the company’s revenue unfavorably. Thirdly, and perhaps most importantly, the fast-food chain is facing some very tough competition on its home turf.
McDonald’s Corporation (NYSE:MCD) saw its US market share climb in its last quarter, despite a drop in US sales by 1.2%. The company has been toying with new offerings, restructuring its stores and aggressive marketing its dollar menu to boost sales.
McDonald’s Corporation (NYSE:MCD) growth in markets like Russia and the UK, lower-priced products and recent initiatives to revamp its image might just cost Burger King a slice of market share. In fact, with plans for product diversification and a bigger brand image, McDonald’s looks like a better bet than Burger King. This share looks all set to grow in the times to come.
Another rival that has been doing decently well in the US is Yum! Brands, Inc. (NYSE:YUM) which reported a 2% growth in same-store sales last quarter, mostly attributable to strong performance by its subsidiary, Taco Bell. The company, however, has been facing issues elsewhere.
Take China, for instance, where its subsidiary KFC got involved in issues related to its chicken supply and avian flu last year. In its last quarter, revenue from China was down 5% year-on-year while operating profits were down 40%. Until Yum! Brands, Inc. (NYSE:YUM) gets its Chinese business back on track, its advisable for investors to stay away from its shares.
What’s the plan?
However, it’s not like Burger King Worldwide Inc (NYSE:BKW) to have no plans up its sleeve to ensure future growth. Not unlike McDonald’s, the company has added value products to its menu, which led to sales growth in March. Burger King’s Whopper Jr. for $1.29 and “2 for $5” promotion raked in sales for the company in the last few months, as did its promotional turkey burger.
In the quarters to come, Burger King Worldwide Inc (NYSE:BKW) plans to work on its offerings, providing more competitive products at lower prices. The company also plans to expand in China by opening over 1,000 stores in the next few years. Currently, the Chinese fast-food market is dominated by Yum! Brands, Inc. (NYSE:YUM), which plans to add 700 new stores to its current total of over 4,500 in the country in 2013.
Burger King has also been working on a re-franchising plan. It has already finished re-franchising its restaurants across the US, Canada, Latin America and Asia Pacific regions.
By the end of 2013, the company will re-franchise 132 restaurants in Germany and Spain. The plan will help Burger King re-organize its cost structure. The company received $9.3 million in its last quarter from re-franchising transactions. The plan has already helped Burger King to reduce its overhead costs by 30%.
Also in the news
Last year, Burger King Worldwide Inc (NYSE:BKW) introduced delivery services in the US. The company now provides its home-delivery service in seven cities in the country. McDonald’s Corporation (NYSE:MCD) and Yum! Brands, Inc. (NYSE:YUM)-owned KFC already have their delivery services in place. While McDonald’s Corporation (NYSE:MCD) delivers in Latin America, Singapore and India, KFC delivers in Canada, South Africa, and Dubai among other places.
There seems to be a reason why the two companies are not deeply exploring delivery services in the US. Maybe a home-delivery facility in the US isn’t as profitable as it is in the other regions. There isn’t much we can do other than wait and watch how Burger King fares in an area where bigger players fear to tread.
The verdict
Burger King Worldwide Inc (NYSE:BKW) has a positive outlook for the future. It increased its dividend by 20% to $0.06. Also, the company plans to buyback shares worth $200 million, pointing toward a strong outlook for the future. I, however, am a bit cautious about where this company is headed.
Its unique selling proposition, or USP, is value food, and with bigger players such as McDonald’s Corporation (NYSE:MCD) ruling the market for low-priced fast food, the company has little foothold for a strong future. Moreover, at 260%, its debt-to-equity ratio is way too high for comfort, not to mention a P/E of 55.4 when the industry ratio is 21.4. If I were you, I’d just wait to see what happens.
The article Will This Company Win the Burger Wars? originally appeared on Fool.com and is written by Sonam Chamaria.
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