Burger King (BKW) Shows Strength on Sales Initiatives - Analyst Blog

On Nov 21, 2014, we issued an updated research report on Burger King Worldwide, Inc. (BKW).

Burger King's earnings have not missed the Zacks Consensus Estimate since 2013. On Nov 4, 2014, the company posted in-line third quarter earnings of 27 cents per share that grew 18.4% year over year driven by higher revenues.

Revenues of $278.9 million missed the consensus mark by only 0.7%. However, it increased 1.4% year over year due to comps growth. Comps improved at most of its segments and were better than the year-ago quarter as well as the prior quarter. Also, the U.S. and Canada region posted highest comparable sales growth since 2012. In fact, the company has been consistently delivering positive comps over the past few quarters, despite sluggish revenues in some of the quarters.

The upside reflects Burger King's sales initiatives, which include product introductions, restaurant upgrades and improved operations. The company follows a strategy of launching fewer but impactful products that keep its guests engaged. Going forward, the company intends to continue to focus on its core menu items, while innovating at the same time. It intends to focus on less served parts of its menu this year, such as breakfast. Simultaneously, the company is trying to simplify its in-restaurant operations to enable seamless execution of its new launches, which is commendable.

Moreover, while most of the restaurant chains in the industry are grappling with margin pressure owing to cost inflation and excessive focus on value-driven offerings, Burger King's performance on the margin front is noteworthy. Additionally, we are encouraged by its cost cutting initiatives, which are expected to boost earnings in the upcoming quarters.

Exposure to faster-growing international markets is the key to Burger King's expansion plans. Moreover, its merger with Tim Hortons Inc. (THI) keeps us optimistic.  The merger would create the third-largest fast food company in the world with a market value of roughly $18 billion. Tim Hortons is a seller of coffee, doughnuts, and other breakfast food items in Canada. After its merger with Tim Hortons, Burger King would be able to enter the grocery business by selling packaged coffee at supermarkets in North America and also reinvigorate its breakfast business.

Moreover, the merger would be beneficial for shareholders. Besides offering revenue synergies as a result of accelerated international growth, the deal would generate costs savings as well. Post merger, Burger King would have greater purchasing power, economies of scale and efficiencies in marketing and operations.

However, like other restaurants, Burger King remains vulnerable to higher food costs, which would dent margins of the company, going forward. Meanwhile, weak consumer spending environment remain headwinds for the company.

Burger King Worldwide presently has a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. (BJRI) and DineEquity, Inc. (DIN). Both these stocks sport a Zacks Rank #1 (Strong Buy).