Click here to access QSR's earnings press release.
On the positive side, momentum continued at Burger King (44% of Adj. EBITDA), driven by new restaurant expansion, the remodeling of outdated restaurants, and strong growth in e-commerce and delivery. The company did take its foot off the pedal a bit, though, in terms of new unit growth.
For the quarter, it reported net restaurant growth of 5.7%, decelerating from last quarter's 6.1% mark and from 1Q18's 6.9% jump. During the earnings call this morning, management commented that the slowdown was related to some planned closures of lower volume restaurants in the U.S. market. QSR believes this is a healthy part of the growth process, as it intends to replace these under-performing locations with new, up-to-date restaurants.
Furthermore, it posted a solid comp of +2.2% at Burger King, beating the Street's +1.8% expectation, and improving on Q4's +1.7% increase. There are a couple main catalysts for its strong comp results.
First, in 2018, it introduced its "BK of Tomorrow" program, which includes modernizing restaurants with technology such as enhanced/digitized drive-thrus, in store check-out kiosks, and the continued build-out of its e-commerce channel. The brand has grown the number of restaurants participating in delivery to about 1,300 locations in the U.S., compared to virtually none at the start of last year.
It's clear these efforts have had a positive impact and QSR says it has hundreds more restaurants in the "BK of Tomorrow" queue.
While Burger King continued to shine, the company faced a set-back at its largest restaurant concept, Tim Hortons (47% of Adj. EBITDA). Five quarters ago, QSR launched its "Winning Together" initiative aimed at reigniting growth. This plan included adding new products, such as new hot and cold beverages, re-designing its packaging, modernizing its restaurants, and launching new advertising campaigns. The initiative has had the desired effect as Tim Hortons' comps have steadily improved.
Rewinding back to 2Q18, QSR posted flat comp growth for the brand. But, in 3Q, it generated a positive comp of +0.6%, followed by further improvement to +1.9% last quarter. However, Tim Hortons hit a speed bump this quarter as comps declined by (0.6)% vs. the +2.0% consensus, leading to this morning's earnings miss.
QSR believes the underlying momentum behind the brand has not slowed, though, pointing to a couple specific factors that caused the softer results in Q1. For instance, it estimates that severe weather across Canada resulted in a drag of about 1% on comp growth.
Additionally, the company's "roll up the rim" marketing campaign under-performed expectations as it experienced a decline in effectiveness last year.
Consequently, QSR ramped up the number of giveaways in order to generate more excitement. The company did not achieve the heightened engagement it hoped for, though, leading to another half-point headwind to comp growth.
The good news is, there is evidence that that these two factors are indeed temporary headwinds and that the arrow is still pointing upward at Tim Horton. Its April-to-date comparable sales performance is back on track, hitting approximately +1.5%.
Additionally, its newly launched rewards program is off to a very strong start as nearly half of its daily transactions are completed with a rewards card.
Key Takeaways: The earnings miss comes as a disappointment following QSR's encouraging Q4 report, highlighted by the growing momentum behind its Tim Hortons brand. That momentum stalled out this quarter, however, as Tim Hortons posted its first negative comp since 1Q18.
QSR does believe the weaker results were partially due to unusually bad weather and that the underlying positive trend remains in place. Additionally, the ongoing transformation at Burger King continues to bolster results and QSR is expecting further strength from that brand throughout 2019.