Shares of Restaurant Brands International (QSR 63.81, +1.11, +1.77%), the owner and operator of restaurant chains
Tim Hortons, Burger King, and Popeyes, jumped higher this morning after the
company reported solid Q4 results before the open. The strong report comes on
the heels of an increased quarterly dividend announcement on January 23, when
QSR lifted its dividend to $0.50/share from $0.45/share. This one-two punch of
good news provided enough of a spark to push the stock to new 52-week highs
The company topped analysts' earnings expectations, but what really stands out about the report is its note of continued improvement at the company’s Tim Hortons brand -- which accounts for over 60% of the company’s total revenue. As we discuss in more detail below, QSR recently initiated a new turnaround strategy for the chain called "Winning Together", which includes the redesign of its restaurants, improved product launches, and more impactful marketing campaigns.
The upgraded comp growth indicates that those revitalization efforts are taking hold. In fact, the company achieved its highest quarterly comparable sales growth figure at Tim Hortons over the past ten quarters.
Additionally, new restaurant growth at Burger King, the ongoing modernization of existing restaurants, including via the construction of more double-lane drive-throughs, and a focus on digital channel development have provided a boost to growth. On the topic of growth, QSR also out-shined a couple of its primary competitors this quarter: McDonald's (MCD) and Dunkin' Brands (DNKN).
On January 30, MCD reported that Q4 revenue fell by 3.3% year/year, compared to +12% for QSR, with MCD commenting during its earning call that a highly promotional environment in the quick service restaurant space impacted results. A week later, DNKN issued its Q4 results in which comparable store sales were flat for its Dunkin U.S. locations (-3.7% for Baskin-Robbins), and with revenue that came in below analysts' expectations at $319 mln vs. the $330 mln consensus. Tim Hortons, meanwhile, posted a +1.9% comp for its fourth quarter, and QSR's total revenue was right in-line with estimates at $1.38 bln.
Review of Q4
QSR posted EPS of $0.68, beating analysts' expectations by a penny, after the company had missed the Street's earnings forecast last quarter for the first time in fourteen quarters. Using new accounting standards, QSR generated operating income of $516 mln. On a comparable basis, using the old standards, operating income would have been up 7% to $539 mln.
Food, packaging, logistics and other operating costs were not an issue this quarter for QSR -- or for other restaurant operators, for that matter. Specifically, QSR's cost of sales were essentially flat at $470 mln; MCD's total operating costs were down 11% year/year to $1.96 bln, and Chipotle’s (CMG) food, beverage, and packaging costs declined to 27.1% of total revenue from 27.5% in the year ago period.
That said, both MCD and CMG stated during the earnings calls that they expect some headwinds this year due to higher labor costs as minimum wage increases take effect. Although QSR didn't echo that sentiment during its call, the company figures to face those same cost pressures.
Outside of the main headline numbers, what investors and analysts honed in on was QSR's comp growth. In particular, the performance of its Tim Hortons brand was in focus as investors looked for signals regarding whether the "Winning Together" program is paying dividends. Looking at the recent trend in comp growth for Tim Horton's, it's fair to say that the program indeed is having a positive impact: Q2 comps were flat; Q3 comps increased to +0.6%; and Q4 comps improved to +1.9%.
Burger King also showed sequential improvement with comparable sales growth of 1.7% compared to 1.0% last quarter. From an overall growth perspective, Burger King continued to outpace both Tim Hortons and Popeyes as it continues to ramp up new restaurant openings. For the quarter, total system-wide sales were up 8.4%, following growth of 12.3% in the year ago period, on net restaurant growth of +6.1% in 4Q18.
Looking ahead, QSR also has a couple significant growth catalysts that its main competitors lack. For instance, last July, it signed a joint venture deal with private equity firm Cartesian Capital Group to open more than 1,500 locations in China over the next decade. To date, QSR's financial results do not reflect any openings in relation to that partnership.
Furthermore, the company still has a long way to go in terms of its Tim Hortons renovations. In 2018, it completed just under 400 renovations, which represents only about 10% of its total restaurants across Canada. The new look restaurants are designed to have a lighter and more natural and welcoming feel, decorated with artwork that reflects the brand's values; upgraded, open concept-seating plans have also been introduced at revamped locations. As we noted above, evidence suggests that the new restaurant concept is enjoying a positive reception from customers.
Lastly, QSR plans to continue ramping up its "Burger King of Tomorrow" image, emphasizing technology such as kiosks, outdoor digital menus, and double drive-through lanes while also expanding its delivery program, which is currently available in nearly 2,000 of its restaurants in North America.
Key Takeaways: In our view, the key takeaway from the quarter is that QSR's turnaround plan for its flagship Tim Hortons brand is working. The positive trend in comparable restaurant sales growth for the chain is encouraging, especially since 90% of its restaurant base has yet to be revamped. Additionally, the steady modernization of its Burger King restaurants is paying off and, similar to others in the quick service restaurant field, the digital channel is becoming an increasingly important growth driver. Looking ahead, QSR's entrance into China represents another key catalyst that could help it sustain the superior growth rates it posted relative to its main rivals.
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