Shares of Burger King Worldwide, Inc. (BKW) hit a new 52-week high of $35.00 on Nov 24. In fact, the company’s share price has increased 9% since it posted impressive third quarter results on Nov 4.
While third quarter earnings came in line with the Zacks Consensus Estimate, revenues missed the same marginally. In fact, the company’s earnings have not missed the consensus mark since 2013. Year-to-date, the company’s share price has gained 56%.
In the third quarter, adjusted earnings of 27 cents per share grew 18.4% year over year driven by higher revenues. Revenues of $278.9 million increased 1.4% year over year due to comps growth. Comps improved at most of its segments and were better than the year-ago quarter as well as the prior quarter. Also, the U.S. and Canada region posted highest comparable sales growth since 2012. In fact, the company has been consistently delivering positive comps over the past few quarters, despite sluggish revenues in some of the quarters.
The upside reflects Burger King’s sales initiatives, which include product introductions, restaurant upgrades and improved operations. The company follows a strategy of launching fewer but impactful products that keep its guests engaged. Going forward, the company intends to continue to focus on its core menu items, while innovating at the same time. It intends to focus on less served parts of its menu this year, such as breakfast. Simultaneously, the company is trying to simplify its in-restaurant operations to enable seamless execution of its new launches, which is commendable. These efforts should help the company to maintain the growth momentum.
Moreover, while most of the restaurant chains in the industry are grappling with margin pressure owing to higher costs and excessive focus on value-driven offerings, Burger King’s initiatives to control costs have safeguarded its margins. Going forward, we expect its cost cutting initiatives to aid earnings.
Burger King remains committed to accelerate international expansion in high-growth potential markets mainly through franchising. Franchising a large chunk of its system helps to boost earnings and reduce its capital requirements.
Meanwhile, Burger King’s pending merger proposal with Tim Hortons Inc. (THI) has also been driving shares up. The merger would create the third-largest fast food company in the world with a market value of roughly $18 billion. Tim Hortons is a seller of coffee, doughnuts, and other breakfast food items in Canada. After its merger with Tim Hortons, Burger King would be able to enter the grocery business by selling packaged coffee at supermarkets in North America and also reinvigorate its breakfast business.
Moreover, the merger would be beneficial for shareholders. Besides offering revenue synergies as a result of accelerated international growth, the deal would generate costs savings as well. Post merger, Burger King is expected to have greater purchasing power, economies of scale and efficiencies in marketing and operations.
Burger King presently has a Zacks Rank #3 (Hold).
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