Burger King Worldwide (BKW) is transforming its business and moving toward a 100% franchisee business model. Its new business model will help it to focus more on creating a brand rather than store operation. It has launched products with more emphasis on value, but has also included limited time offerings in the premium segment to drive sales growth. Its store expansion plans, along with its re-imaging program, will be a growth driver for the company. Now, let's discuss these initiatives in detail.
Franchising business model will help the company to focus on creating a strong brand
Burger King has been in the process of transforming its business model since 2011. It has completed 97% of the re-franchising by the end of the 1 st quarter, and will complete the entire program by the end of fiscal 2013. It has focused on giving franchises of its stores to operators who are the best in the business. These operators have to support the company to implement its long-term strategic initiatives to drive growth. They are selected only after they agree on commitments to stick to the development goals of the company. This business model will help the company in developing a strong brand rather than spending its entire energy on day-to-day operations.
Menu adjustments and new marketing initiatives are expected to drive same-store sales
Burger King focused on both value and premium offerings last year and will continue to balance its offerings this year too. It has launched a $1.29 Whooper Junior and 2 for $5 special in value offerings in the 1 st quarter. In the premium segment, limited time offerings - Chipotle Whooper and Turkey Burger - helped to achieve higher sales. It has also taken marketing initiatives and promoted its menu with national advertisements. It has removed that King character from its marketing efforts and focused on a more food-centric approach. It is expected to help the company to attract more kids and women to its stores and drive comparable sales.
Store expansion and re-imaging program will drive growth
Burger Kind expanded its store base last year by entering into the new markets, and will be increasing its number of international stores this year. It increased its stores last year in Brazil, Russia and China and will continue store growth this year with 500-750 net new units. Its re-imaging program is another sales growth driver for it. This re-imaging program is more cost effective and is a high-return investment. It has completed 19% of the stores and is on the way to achieve a target of 40% re-imaged stores by the year 2015. This re-imaging program has helped stores to increase sales by 10-15% and will drive the company's sales.
Burger King has taken initiatives to drive long-term growth but its recent quarterly results have been affected by a challenging consumer and competitive environment in the U.S. and Canada. If we eliminate the Foreign Exchange and refranchising benefits, its revenue would have decreased by 2.1%. Its store growth plans have slowed down a bit in the 1 st quarter with only four net openings. Its capital expenditure for this year is also expected to remain around $30-$40 million, which is 75% of the last few years.
In the fast casual Burger restaurants segment, the other two competitors of Burger King are The Wendy's Company (NASDAQ:WEN) and Sonic Corporation (NASDAQ:SONC). Wendy's is on an image transformation mode under its "Image Activation Program." The company has remodeled 60 stores and will be looking to complete 100 stores by the end of the year 2013. Apart from this image transformation, it has refocused on value this year with its "Right Size, Right Price" menu. It has products at two price points with some flexibility to serve a broad range of value customers. It has also removed breakfast off of its menu in the non-performing markets. Its initiatives of Image transformation and value offering are expected to drive the company's sales.
Sonic Corporation is driving its growth with its business model, which allows it to serve the "made to order" food to customers. This helps it to make business more customer centric and keep offering something innovative to its customers. It spends 70% of its marketing budget on national cable and 30% on local television and other media. Its product pipeline with products such as Molten Lava Cake Sundae for morning and evening and Sweet Potato Tots and Spicy Jumbo Popcorn Sandwich in afternoon snacks is expected to attract more customers to its stores. Its new product launches and marketing efforts are expected to drive sales growth for it.
1 yr. Forward P/E
Source: Google Finance and Yahoo! Finance
Burger King has reported the highest operating margin of 31.25% among the three mentioned peers but with a moderate 1-year forward P/E of 23.08. Wendy's has the lowest P/S ratio of 0.97 but with the highest forward P/E of 25.83. Sonic Corporation has an operating margin of 10.37% and the lowest forward P/E of 17.92.
Burger King is moving toward a 100% franchising business model by the end of this fiscal year. It has introduced new products and focused on marketing to drive sales growth of the company. Its stores growth and re-imaging program are expected to drive the company's sales in the long term. Although, the company's last quarter results were affected by challenging macro conditions, I believe above mentioned initiatives will continue to drive its growth in the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.