Adding TAST to the LONG BIAS list
The improvement in Carrol's profitability could be a leading indicator of franchisee profitability in the Burger King system, which is core to the LONG thesis for Restaurant Brands (QSR).
Carrols Restaurant (TAST) is one of the largest restaurant franchisees in the United States, operating 1,087 restaurants across the Burger King and Popeyes brands. With 1,022 Burger King restaurants, Carrols is the largest Burger King franchisee in the country, operating approximately 15% of all U.S. Burger Kings. TAST has seen its stock price increase 49% YTD, but down 70% over the past two years. The addition of TAST is consistent with our belief that incremental changes are happening at Restaurant Brands and its Burger King brand (Burger King Corp owning a 15.1% fully diluted position.) The company has struggled with profitability and cash flow since before the pandemic and has been hit hard by inflation which has led EBITDA to decline from a peak of $108 million in 2020 to $62 million in 2022. Complicating the company recovery is a highly leveraged balance sheet at 5-6x NTM DEBT/EBITDA. In 4Q22, the company's free cash flow increased 65% to $14.5M (the highest in two years). The company ended 4Q22 with $211.2M of liquidity. TAST easily beat 4Q22 Non-GAAP EPS of (-$0.05) beats by $0.16 and revenue of $445.1M (+7.0% Y/Y) beats by $10.79M.
- Comparable restaurant sales for the Company's Burger King restaurants increased by 6.2% (pricing up 9.6%; average check rose 13.3%, and traffic, meanwhile, declined 6.2%.)
- Comparable restaurant sales for the Company’s Popeyes restaurants increased by 9.2%;
- The company posted EBIT of $2.8 million, the first profitable quarter since 2Q21
- Adjusted EBITDA totaled $25.4 million, up 80% from $13.9 million in 4Q21
Fewer discounts drove the increase in profitability; discounting decreased from about 19% of sales in 4Q21 to about 14% in 4Q22. We see the improvement in Carrol's profitability as a potential leading indicator of franchisee profitability in the Burger King system, which is core to the QSR story. One of the challenges that Carrols and other franchisees have faced in the past was Burger King’s traditional reliance on discounting to get customers in the door. The brand had traditionally been among the most aggressive discounters in the fast-food space. But the brand started moving away from that strategy early last year, taking items like the Whopper off its discount menu and reducing some of its reliance on coupons. The company guided that January and February are up in the “high end” of the mid-single-digits range. The interim CEO suggested that Burger King’s $400 million revitalization initiative, called “Reclaim the Flame,” is having an impact and also suggested that Burger King’s marketing appears to be working. He said the company had seen a “great reception in our restaurants” to the company’s “You Rule” marketing campaign and noted that its “Whopper Whopper” jingle has gone viral.
I briefly talked about TAST on this weekend's Consumables Chalk Talk (3/5/23): CLICK HERE
Black Book Presentation Today (BUD)
@Hedgeye_Staples recently added Anheuser-Busch InBev to the Long Bias List. The beer industry has moved to protect margins due to COGS inflation through aggressive price increases, leading to weak volume demand in 2022. Management’s price increases offset the cost pressures with some loss of volume – a tradeoff the company is used to making. The beer category is now showing signs of stabilizing volumes.
The company has reduced leverage from more than 5x at the outset of the pandemic to 4x. The EV/EBITDA multiple has not changed, making the equity more attractive. Relative to the market BUD is an outperformer in Quads 1 and 4. Its strongest absolute performance historically has been in Quad 1. More focus on international growth and a flipped Fx outlook would benefit AB InBev. We will vet whether the company can recover margins after years of contraction and enter a positive earnings revision cycle. We will also refresh our outlook for the beer sector in 2023 and BUD's prospects specifically by examining:
- Geographic trends
- Competition with other alcoholic beverages
- The outlook for on-premise vs. off-premise
- Cost drivers
- Price increases and demand elasticity
- International growth hot spots
- And more
