Burger King Is Grilling Right Along

by Alyssa Oursler | August 1, 2012 2:14 pm

Burger King Worldwide (NYSE:BKW[1]) just cooked up a whopper — only this time, it’s not a burger.

The company’s first earnings report as a once-again-public company[2], out Wednesday morning, was a blockbuster, with second-quarter profits jumping 60% to $48.2 million in the past three months, and adjusted EPS coming in at 17 cents — a healthy 3 cents more than Wall Street estimates.

Investors balked at the Q2 earnings news, however, with BKW shares down slightly Wednesday. But if they’re waiting for a second taste of success before getting excited, they might not have to wait for long.

The American fast-food giant has been busy branching out beyond the U.S. in the past few years. The biggest expansion plans come from China, where Burger King expects to open 1,000 restaurants[3] by 2019.

OK, it’s not exactly an innovative strategy — Yum! Brands (NYSE:YUM[4]) opened 168 restaurants in China earlier this year, and McDonald’s (NYSE:MCD[5]) currently operates 1,400 restaurants in the country — but it’s one that needed to be adopted.

Plus, Burger King isn’t just going to China. It also has partnered with Russian franchisees to launch hundreds of new locations[6] there in coming years — a deal the company says is the biggest multi-unit development agreement in its history.

Throw in the fact that 80% of new store openings in the past year were abroad in locations from Europe to the Middle East to Africa, and you begin to see the King’s global aspirations.

But in today economic climate, global breadth doesn’t guarantee success.

McDonald’s, for example, is off around 10% year-to-date in part because of its worldwide presence — the kind that Burger King is striving to achieve. The weakening global economy hurt its profits last quarter, and BKW could face the same problems after its expansion if things don’t pick up.

Yum Brands is another good example. Sure, the company is up an impressive 23% in the past year and generated more than 44% of sales and 42% of operating profit from China. But last quarter saw some growing pains. While business grew 27% in China, YUM actually saw a rare decline in profitability[7] there thanks to currency translation and labor costs — and the latter problem is one that could get worse[8] for all companies doing business in the country.

Not to mention, some — such as Fitch Ratings Agency — actually view YUM’s heavy exposure to China as a cause for concern[9].

Still, Burger King is far from reaching saturation anywhere. The thousand new BKs proposed in China? That’s on top of a current 63. And across the world, Burger King’s presence pales in comparison to McDonald’s; the King’s 12,600 stores are merely a third of the Golden Arches’.

Plus, international expansion is only half the battle. The U.S. still matters — and Burger King hasn’t forgotten about its customers at home.

Same-store sales grew 4.4% last quarter. Much of that success probably can be pinned on the many changes the company has implemented for its stores — BKW has worked hard to revamp its image and appeal to a wider audience.

In April, for example, Burger King launched its largest menu expansion ever, adding healthier options such as smoothies and salads for calorie-counting customers. Then, as summer kicked off, it debuted a limited-time menu that would appeal to … well, those not exactly in the healthy crowd[10].

For the early-risers? A new breakfast menu[11] complete with Starbucks (NASDAQ:SBUX[12]) subsidiary Seattle’s Best coffee. For the homebodies? Home delivery of its fast food[13]. For the animal-friendly? A cage-free promise[14].

Investors might have been relatively indifferent to Burger King’s eye-popping earnings news because that growth in profits and same-store sales also came with a 9% decrease in overall revenue.

But Burger King sure isn’t sitting still. If its global expansion go as planned, sales should get back on track — and investors will be just about out of reasons not to push up BKW shares.

As of writing this, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. BKW: http://studio-5.financialcontent.com/investplace/quote?Symbol=BKW
  2. once-again-public company: http://investorplace.com/2012/06/burger-king-stock-bkw-is-back-without-an-ipo/
  3. expects to open 1,000 restaurants: http://investorplace.com/2012/06/burger-king-plans-to-add-1000-restaurants-in-china/
  4. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  5. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  6. launch hundreds of new locations: http://investorplace.com/2012/06/burger-king-plans-to-invade-this-country/
  7. rare decline in profitability: http://investorplace.com/2012/07/yum-brands-q2-growth-overshadowed-by-china-woes/
  8. that could get worse: http://investorplace.com/2012/07/surprise-cheap-labor-isnt-so-cheap-anymore/
  9. a cause for concern: http://www.bizjournals.com/louisville/blog/morning_call/2012/07/yum-brands-exposure-in-china-concern.html
  10. not exactly in the healthy crowd: http://investorplace.com/2012/06/4-things-to-know-about-bks-bacon-sundae/
  11. A new breakfast menu: http://investorplace.com/2010/09/burger-king-breakfast-menu-compete-mcdonalds/
  12. SBUX: http://studio-5.financialcontent.com/investplace/quote?Symbol=SBUX
  13. Home delivery of its fast food: http://investorplace.com/2012/01/burger-king-testing-home-delivery/
  14. A cage-free promise: http://investorplace.com/2012/04/burger-king-makes-cage-free-promise/

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