With both Burger King (BKC) and Yum! Brand (YUM) earnings out last week, a number of similarities between the circumstances facing the two are apparent. Both companies are trying to emerge from the same store sales slump that most of the QSR sector has faced since late 2008. YUM may have a margin pickup advantage going forward, however. (See BKC's earnings conference call transcript here and Yum! Brands' here.)
Burger King did post an improvement to the comparable sales trend, at -2 % worldwide system versus -4.5% and -4.6% two quarters earlier. But we think that most of this gain occurred after the October 19th start of the $1 double cheeseburger offer. However, there was no analyst query whether the promotion paid off by generating enough traffic improvement, with BKC noting the cannibalization of higher priced items was “within their expectations.”
With US/Canada comps at -3.3%, and a surprising 3.7% in price present, and customer traffic perhaps 1% positive (extrapolated per the news release), that meant that the product mix was negative 8% or more. BKC remains focused on this offer until late February, when the $3.99 base price XT Burger is featured.
The Miami Herald noted last week a survey from the BK Purchasing Co-op that showed franchisee sales results were weaker than the company reported. Reading these promotions is an art and requires test and control market trends, at a minimum. But the results are likely less than what they needed, as the big negative mix shift drove up the requirement for additional traffic to offset the check loss.
YUM likely now has all three of their major brands (KFC, Taco Bell and Pizza Hut) in negative sales territory. YUM now doesn’t break out their brands, but the US was negative 8%, China at -1% and Yum International at minus 2%, with the comp sales trend worse sequentially. We estimate that in the US, Taco Bell is perhaps -2, KFC –8 to 10% and Pizza Hut mid 10% plus zone negative. YUM noted the prospect of US franchisee KFC closures and noted 20% of its franchisees were late on royalty payments, an increase.
YUM noted that the Pizza Hut $10 anytime/any kind Pizza offer dramatically reversed the negative sales trend in January. YUM noted that its multi-branding strategy (multiple concepts on one location) would be tactical, rather than automatic. Analysts wondered if YUM should limit its earnings downside by selling its US Pizza Hut and KFC units faster.
Both companies beat earnings estimates, by posting either commodity cost savings or G&A reductions, or both, to beat the consensus estimate. CNBC reported Friday that 74% of all reported companies beat earnings estimates. YUM noted refranchising was profitable only with the G&A savings. Both companies opened new units, particularly X-US. YUM hit their refranchising goals, which is difficult to do in this difficult credit environment. Franchisees likely got bigger, which is numerically helpful.
Both companies are now, or hope to be, about 90% franchised and discussion of the parent franchisor financials only means so much, analytically. Both companies had stronger company operated unit trends versus franchisees. Both BKC and the KFC component of YUM are mired in franchisee litigation, although BKC noted some hope for resolution of the KFC soda fund controversy.
Both companies remain essentially price focused and are hoping to score either trade-up or incremental traffic. Both had weak US results. Both companies are vulnerable to our year commodity cost increases over the now cyclical low points that were realized in Q3 2009.
Future: BK took fairly aggressive 3.7% price increases in 2009, and likely cannot take more anytime soon. YUM took no new prices in 2009, and may thus have an opportunity for gains. And YUM will be focusing on buybacks. But we are not sure YUM’s sales erosion has been halted, as it seems exceedingly price focused and was light on new product news, and China remains murky.
Disclosure: no positions