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Conclusion:  There is no near-term upside for Burger King Franchisees as the brand is being hit with both weak top-line trends and higher beef costs.  The recent sale of the company has more than angered a number of key franchisees.  Guess what, they want out!


THE CURRENT STATE OF BUSINESS:


TAST’s Burger King trends decelerated during the third quarter, with same-store sales coming in -3.2% versus -6.1% a year ago.  On a two-year average basis, this implies a 160 bp slowdown from the prior quarter.  And, comparable sales growth continued to be weak in October, -3.5% (relatively flat on a two-year average basis with 3Q10 level). 

Making matters worse for the Burger King franchisee, beef costs were up 17.5% YOY.  Profitability was also hurt during the quarter by the concept’s promotional offerings.  Beef usage was actually up 9.1% YOY due to the increased mix of lower priced burgers.  Given the company’s outlook for comp sales to be down 3 to 4% in FY10 (implies -1 to -5% in 4Q10) and commodity costs at Burger King to be up 4 to 5% in FY10 and up about 3% FY11, there does not seem to be any near-term upside. 

The only seemingly good news for the brand stemmed from Burger King’s breakfast daypart as sales have improved following the concept’s new breakfast offering, supported by advertising.  The results are still early as the new breakfast promotion only launched in mid-September, but breakfast sales have grown to 16 to 17% of sales from 13 to 14%.  The stronger breakfast trends, however, have been offset by continued weakness during lunch and dinner.  That being said, TAST management stated that it remains cautious with respect to a near-term turnaround at Burger King, but they are “hopeful” that they are nearing the bottom of the cycle.

PUTTING A GOOD FACE ON THE LONG-TERM:


Management highlighted the recent ownership and management changes at Burger King Corporation and said they are awaiting the brand’s new marketing plans.  Specifically, TAST management said they expect Burger King’s new management should be able to revitalize the brand. 

BUT IN THE END, THEY JUST WANT OUT:


Although the last comment seems to express some level of confidence in Burger King’s new management and the future success of the brand, what followed was less than bullish commentary about the Burger King brand, at least as it relates to its security as a brand within Carrols Restaurant Group, Inc:

“We, as I said are basically a company that is in transition, we recognize that our inventory of business is being a franchisee in the Burger King system and being owner operator of two very vibrant Hispanic brands may appear, and probably is, somewhat unnatural in terms of attracting investors and it becomes a very high priority for us to make ourselves look a little more natural for the investor public and will continue to pursue that possibility. We're very bullish on our Hispanic brand and their ability to provide long-term sustainable growth. “

Given that management thinks they need to make the company “look a little more natural for the investor public,” will pursue that opportunity and is bullish about its Hispanic brands, implies to me that the company would be happy to exit the Burger King franchising business if offered the right price.

These comments also highlight the broader Burger King franchisee community’s anger with Burger King Corporation, particularly as it relates to the company’s recent sale.  Franchisees are fed up!

Howard Penney

Managing Director