Burger King (BKW) Tops Fourth Quarter Expectations

Burger King Worldwide (BKW: Charts, News), the world's second largest hamburger chain, recently surprised analysts with stronger than expected fourth quarter results, that beat estimates on both top and bottom lines. Burger King reported adjusted earnings of 14 cents per share, or $48.6 million, on revenue of $404.5 million.

Adjusting for one-time costs, earnings came in at 23 cents per share, exceeding the FactSet analyst estimate of 15 cents per share. Revenue also topped the consensus estimate of $375.3 million. Daily Chart
For the full year, Burger King earned 33 cents per share, or $117.7 million, a significant improvement from the 25 cents per share, or $88.1 million, it posted in the prior year quarter. However, annual revenue slid 16% from $2.34 billion to $1.97 billion. The company shifted away from its restaurant-owned business and towards a franchise-based one, which collects royalties from investors with minimal downside risk. The company is currently 97% franchised, an increase from 90% at the end of 2011. The franchisee model has slashed costs substantially. Total fourth-quarter operating costs decreased by more than 40% to $292.6 million, which was also aided by lower costs for food, packaging, payroll and rent. Adjusted earnings more than tripled from the prior year quarter, but revenue slid 30% due to re-franchising costs. Brazil-based investment firm 3G Capital, which recently made headlines with its co-investment in Heinz (HNZ: Charts, News) with Berkshire Hathaway (BRK.A: Charts, News), originally took Burger King private in 2010 and brought it back to the public market less than a year ago. Burger King owns 12,900 stores worldwide across 86 countries and territories. Burger King attributed its robust fourth quarter earnings to a revamped menu, but admitted that it needed a more competitive value menu to compete with McDonald's (MCD: Charts, News), Wendy's (WEN: Charts, News) and Yum Brand's (YUM: Charts, News) primary franchises - Taco Bell, Pizza Hut and KFC. Throughout the quarter, Burger King had been focusing on its premium, higher margin products over value ones. However, as a concession to its cheaper competitors, North American operations president Steve Wilborg launched a limited-time offer for a $1.28 Junior Whopper. Value menus have been increasingly important after the U.S. payroll tax increase in January cut into discretionary spending. The quick serve restaurant industry has been focused on value menu products, since industry growth is expected to be flat to modestly up for the year. McDonald's recently added a Grilled Onion Cheddar Burger to its Dollar Menu, and has added six-piece chicken nuggets to its value menu in select markets. Wendy's also added new products to its 99 cent menu, and added a "Right Price, Right Size" tiered pricing system that goes up to $2 per item. Burger King also downplayed a recent scandal in Europe, where tests showed that various ground beef products across the region actually contained horsemeat. CEO Bernardo Hees stated that the company had sidestepped these issues, and sales in the United Kingdom actually rose in January and February. Global same-store sales rose 2.7% during the fourth quarter, boosted by a 3.7% rise in the United States and Canada. Burger King easily outperformed McDonald's, which posted anemic 0.1% same-store sales growth globally and 0.3% growth in the United States. Burger King attributed its strong North American numbers to new menu items such as the chicken Parmesan sandwich, holiday gingerbread milkshakes and Cinnabon Minibon rolls. Burger King posted modest, but positive growth in international markets. In the EMEA (Europe, Middle East and Africa) region, it posted 1.6% same-store sales growth. In Latin America and the Asia Pacific region, it posted more modest growth of 0.7% and 0.8%, respectively. Smaller restaurant chains such as Burger King and Wendy's are considered to be more agile than McDonald's, changing menus more frequently to target specific regions or macro trends. During 2012, the company also renovated approximately 600 restaurants in the United States and Canada, adding more field managers to assist its franchises. Looking forward, Burger King expects 3% food inflation to impact beef prices. However, the company forecasts flat or declining prices for potatoes, paper packaging and cooking oil, which should offset those higher prices. Shares of Burger King Worldwide trade at 24.45 times forward earnings - a steep premium to its fast food competitors - and has a 5-year PEG ratio of 1.60, suggesting moderate to strong growth in the future. The stock pays a quarterly dividend of 4 cents per share, a 1% yield at current prices. Other News About BKW Burger King Profit Boosted by Cost Cuts, New Food Lower costs and newer food boost Burger King's earnings. Burger King 4Q Results Top Analysts' Estimates Burger King surprises analysts. Other Stocks in the News Weight Watchers Goes on a Crash Diet How did Weight Watchers shed 20% of its market cap overnight? Time Warner Learns That Less is More Is Time Warner leaner and meaner than before? Copyright 2013 by InvestorGuide.com, Inc. 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Published on Feb 18, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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