BKW remains a short in the Hedgeye Restaurants Position monitory.
Two areas continue to concern us within the Burger King business:
- Same-restaurant sales trends
- The remodel program
The bullish thesis hinges on 2012 same-restaurant sales demonstrating that the strategies BKW has been pursuing are effective. We disagree. A slowdown in early 2013, that we believe is underway at BKW, will shake the prevalent belief that the Burger King turnaround is a done deal.
- Challenging competitive environment, esp with MCD spending on marketing
- Weather comparisons
- Payroll tax hike
- Gas prices
- Tough comparisons
- Brand association with horsemeat scandal
Carrols Restaurant Group (TAST), a franchisee of Burger King and is seeing February SRS tracking -4% to -5%, including average check of 3-4%, implying traffic down between 7% and 9%. TAST management is still guiding to a 2-4% comp for FY13. We do not expect this guidance to be achieved.
Longer-term, we are skeptical that management’s goal of having 40% of the system remodeled over the next three years will be met. The current sales lift from remodeled stores within the Carrols system is running at 8-10%, below what BKW has guided to: 10-20%. This disappointing sales lift should increase skepticism in the long-term viability of the remodel program.
Don’t take our word for it, Carrols management said the following: “We would hope to remodel at an aggressive pace, but recognize that we may need to temper this, based on how the year progresses.”