Burger King's (BKW) Value Menu Troubles
The market has been indifferent to Burger King Worldwide's (BKW) first quarter earnings, which the company reported at the end of April. However, Burger King's lopsided earnings and sales growth, along with its strong international growth, indicate that investors should take a closer look at the third-largest burger chain in America. Daily Chart
For its first quarter, Burger King reported that its net income rose to $35.8 million, or $0.10 per share, up from $0.04 per share, or $14.3 million, a year earlier.
However, revenue declined 42% to $327.7 million. Global same-store sales declined 1.4%, led by a 3.0% same-stores drop in the United States and Canada. This uneven growth in its top and bottom lines was attributed to a poor mix of menu items during the quarter. The company acknowledged that it wasn't using enough value menu items to drive sales, making a similar, costly mistake as its rival Wendy's (WEN
). Last quarter, Wendy's also didn't put enough emphasis on its value menu offerings, instead concentrating on releasing newer premium items and renovating stores. The result was a top line miss that sent shares down 5% post earnings. Alex Macedo, the president of Burger King's North America division, noted that Burger King "had strayed from the strategy of having both premium and value messages in the marketing mix." Yet he emphasized that Burger King would get back on track by bringing back previous promotions such as the "2 for $5 special" and $1.29 Whopper Junior. Although its revenue decline highlighted the weakness of its value menu, Burger King reported strong sales of several unique, limited-time offerings such as a turkey burger, Cheesy Tots and a Chipotle Whopper, all of which bore the influence of its smaller competitor, Sonic (SONC
). Burger King's introduction of a new coffee program featuring Seattle's Best Coffee to complement its breakfast menu was also well received. Sales of coffee rose 20% after the change, indicating that Burger King could be developing a strong contender against McDonald's (MCD
) popular McCafe beverages and snacks menu. Meanwhile, Burger King is renovating its locations for a new modern look. These renovations, which started after the company was taken private in 2010 by 3G Capital, have already resulted in the renovations of 600 locations, or 19% of its system. Burger King intends to renovate 40% of its total restaurants by the end of 2015. While Burger King was weak in North America and Latin America, same-store sales rose in Europe and Asia, by 0.8% and 2.7%, respectively. This growth outpaced McDonald's in both regions, and shows that despite its smaller size, Burger King has a strong chance to grow in these overseas markets. Shares of Burger King Worldwide currently trade at 20.5 times forward earnings with a 5-year PEG ratio of 1.38, which suggests that the stock is slightly overvalued but has moderate growth potential. The stock also pays a quarterly dividend of $0.06 per share - a 1.29% yield at current prices. Other News About BKW Burger King to Use SA as Platform for African Growth
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Published on May 14, 2013
By Leo Sun